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One of the main features of the economy under COVID-19 has been the absolute unpredictability of the stock market. Americans everywhere are struggling to save money, especially for retirement. Luckily, the Department of Labor (DoL) is instituting a change that will allow ordinary investors to get more bang for their buck for their defined contribution retirement plans, including 401(k) plans.
In an information letter, the DoL announced that defined contribution plans would now have access to private equity as an investment option. The potential impact of such a change cannot be understated. However, given the complex nature of private equity investments and other factors, this change does limit private equity investments to part of a diversified portfolio, not as a standalone option.
Of this clarification, Labor Secretary Eugene Scalie said in a statement:
“This Information Letter will help Americans saving for retirement gain access to alternative investments that often provide strong returns... The Letter helps level the playing field for ordinary investors and is another step by the Department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”
This is a huge development for people who want to save and provide for their families. Research shows that private equity often outperforms the U.S. stock market overall. The shame is that previously, this option was only available to large investors like pensions or endowments. Now, everyday Americans will have that option available to them and can do so through their own 401(k) plans.
This change will also provide much-needed certainty. Plan fiduciaries can now offer these investment options and incorporate them in their strategy without fear of retribution. The DoL, with its new letter, is signaling that federal law allows them to do so and is on their side. To be clear, there is no federal requirement that these plans be made available, only that they have the option if they want. Availability of options is what the free market is all about.
Arrayed on the other side are the usual suspects, such as Sen. Elizabeth Warren (D-Mass.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.). Politicians on the left have used this pandemic to try and shut down economic flexibility by banning mergers and vilifying private equity. This is incredibly counterproductive as these measures may be necessary to maintain jobs and, as has already been mentioned, better savings options.
FreedomWorks and other conservative groups condemned this rhetoric and the proposals accompanying it in a coalition letter last month.
While the left and others who want a behemoth regulatory state look to restrict your retirement options, even in the midst of the pandemic, Secretary Scalia is helping Americans save when they desperately need all options available to do so. This information letter is an important clarification that embodies the deregulatory spirit of the Trump administration and is an excellent follow up to the administration’s executive order mandating agencies help the economy recover.