Last month, in a judicious move, the US Department of Labor (DOL) announced intentions to allow defined contribution plans to offer its participants exposure to private equity investment opportunities.
Although democratizing access to investment products and fostering asset class diversification will accomplish more to narrow the national wealth gap and thwart a looming retirement crisis than the attempts of previous administrations, lo and behold, the DOL’s action was met with plenty of unwarranted negative press.
Based on some of the media outrage, one would have thought that Trump’s DOL was forcing specified retirement plans into sub-1% yielding treasury investments. Nope. That was actually the prior administration’s retirement solution, also known as the failed MyRA. Even though the government profited from its high cost scheme to offer below-market rate securities to lower income American workers, Obama’s MyRA ruse ended up costing taxpayers $72.4M while doing nothing to halt America’s mounting retirement problems.
Unlike the bungled MyRA, which restricted investment choice, no one today is being coerced into investing in any particular asset class, including private equity. Nor are plan participants being compelled to reach beyond their risk tolerance. The DOL’s recent move does nothing more than provide another diversified fund option to American workers – one that simply contains a private equity component among a sufficient pool of assets.
Yet, adding another option was all took for some detractors to claim that American workers were being fed to the wolves by the DOL. Wow. Remember when having options was celebrated in the United States? Have Americans become so accustomed to having their freedoms stripped during the recent months of forced quarantine that they can no longer even recognize choice?
If the DOL should be criticized for anything, it should be for not going far enough to provide American workers with access to private equity opportunities, for its June 3, 2020 Information Letter does not specifically authorize making private equity investments available for direct investment on a stand-alone basis.
However, one can only hope that this initiative is merely a first step in a broader plan by regulators to unlock access not only to direct private equity opportunities, but to the entire unfolding universe of alternative investment products which, thanks to digital innovation, are being made available for public consumption in micro units. Democratizing access to investment products – by making them both legal and affordable – is the only way to ensure that all Americans can have equal chances to enhance portfolio returns and mitigate risk through diversification. (See: https://daraalbrightmedia.com/2020/02/06/how-amending-the-accredited-investor-rule-can-stabilize-markets-enhance-portfolio-returns-and-foster-innovation/ highlighting technology’s ability to democratize diversification as well as provide greater transparency to non-public assets. The piece also discusses a novel process called “Asset Tokenization” which facilitates the fractional ownership of once illiquid and pricey assets such as private equity.)
It is ironic that the very same people always screaming for financial equality are the ones now denouncing an initiative that would help accomplish exactly that. The fact is, mostly due to cumbersome regulations and exorbitant costs, businesses today aren’t rushing to make their stock available to the public. As a result, America’s most promising growth companies are no longer appreciating in the retirement portfolios of ordinary Americans. Instead, today’s most coveted growth opportunities are accumulating gains in the coffers of venture capitalists and private equity firms at the expense of American savers.
The infographic below illustrates this injustice while underscoring the necessity for exposure to private equity in modern retirement portfolios.
Despite the attempts by some to spin it as a detriment to U.S. citizens, the DOL’s recent move is, in reality, a huge victory for American workers whose retirement accounts have been at the mercy of the $17.7 trillion mutual fund industry’s decades long monopoly on 401(k)s. Anytime that more choices are imparted, liberties are granted and monopolies are broken up, the populace ultimately wins. It really is as simple as that.
I personally can’t think of a more appropriate occasion, than on this particular independence day, to celebrate choices as well as to reflect upon the fundamental principle that cultivated upward mobility and enabled a vast farmland to transform into the greatest economic superpower in the history of the world: the freedom to invest in the ingenuity and innovation of our fellow citizens.
Happy 244th Birthday America!
Click twice to enlarge infographic