Last month, the Department of Labor proposed a rule aimed at allowing Americans to use their 401(k) plans to invest in private investments, such as real estate, private equity (PE) funds, digital assets like cryptocurrency, non-public companies, and private debt offerings.
It’s good news that the Trump administration is thinking outside the box for mom-and-pop investors. For far too long the fastest-growing companies have been unavailable to regular investors. However, this proposal is not without certain risks and complications, and is misguided. There may be a better way to achieve the goal of allowing people access to opportunities of this type, while also providing far more companies with badly needed access to capital.
Many Risks
The vast majority of people lack the sophistication to evaluate the risks of private market investments. The burden of due diligence is on them. Whether it’s understanding the business, the balance sheet, or the terms, investors don’t have a portfolio manager making those queries on their behalf like they would with a mutual fund or a retirement-date portfolio.
Furthermore, it’s hard to see how the public will be able to allocate their money in a way that compliments their entire portfolio while taking the correct amount of risk for their goals. Private market investments are inherently more risky and suffering a loss in one could set back an investor’s retirement by years if not carefully managed. Banks only offer these investments to very wealthy clients. This isn’t because they are catering to them, it’s because the minimums are usually in the low- to mid- six figures and only the wealthy can make the required investment and still have enough diversification to survive a catastrophic loss and still meet their investment goals.
Some would argue that plan fiduciaries can evaluate these investments, which is not what they do in the normal course of their duties. It is also thought that these investments could be bundled so there is diversity, but that would increase the minimum investment and subsequent costs associated with the products.
Functionally, unless you have millions of dollars in your IRA or 401(k), it will be difficult to make this work, and the people who do usually have assets outside their retirement they can use instead.
Getting Money Out
At their core, retirement funds are designed to be spent down to supplement retirement income. After you are 73 years old, you are required to take distributions by law. Actually getting your money out of private-equity funds can be difficult if not impossible, and is incredibly expensive.
Private investment funds routinely gate their redemptions to a few percent a year. Blackstone’s B-REIT limits withdrawals to 2 percent a month. Blue Owl limited redemptions on some of its funds to 5 percent. Morgan Stanley, JP Morgan, T. Rowe Price, and Cliffwater all limited redemptions on funds this year. If you are relying on liquidity for living expenses as well as required minimum distributions, it’s hard to make a case for the suitability of these investments for retirement plans.
Fees
If retirement plan providers package these investments so investors have a measure of diversity, like the “fund of funds” model, there will be additional management fees, and with most “alternative investments” (investments that are not stocks, bonds, or mutual funds) there is usually a “success” fee that can be as much as 20 percent of the profits a year. With these constraints, it is difficult to imagine how investments of this type will outperform listed equities.
In fact, from 2008 through 2018, the S&P 500 did much better than the hedge fund index; the S&P 500 experienced a 148.45 percent gain while the index increased by only 40.08 percent. The period from 2018 to 2025 is similar, with the S&P 500 outperforming every single year. Except the years where there is a black swan, being in simple, liquid investments is a clear gross return winner.
A Better Alternative
Does that mean the public will never have access to these opportunities? There may be another way to do this.
What if it were possible for a taxpayer to take a portion of their tax return and contribute it to a national PE fund that makes angel/Series A round/venture debt investments into emerging growth businesses? Every fiscal tax year can have a new fund of this kind. The funds can have a mandated final maturity of 7-10 years, with the proceeds allowable into a Roth IRA.
The decision where to invest could be handled at the Small Business Association or local bank level, where local marketplace experience would be helpful for quality control, because those are the folks that are most aware of business conditions in their area. The government could incentivize banks, accountancies, and law firms to offer pro bono services to mentor emerging businesses, ensuring the best chance for their success.
In any given year you could tier the investments by size and type, ensuring diversity, and use tax incentives to coax high potential companies to participate.
Reinvigorating Small Businesses
There are 153 million taxpayers in the United States. Hypothetically, if half of them contributed $500 to the fund it would be seeded annually with $76.5 billion, which would go a long way toward reinvigorating small businesses — doubly so with the Trump administration’s re-shoring efforts creating authentic demand. It would not displace PE. On average $2 trillion is invested into PE every year, so this national fund would command around 4 percent of the market, with significant assets placed into companies that are too small for PE anyway. That’s not enough money to displace large institutional investors, but enough to significantly enhance mom and pop taxpayers’ wealth and provide transformational amounts of capital to small businesses all over the country.
If 30 percent of the companies managed to grow at 25 percent for the 10-year term, and 70 percent failed, the final value of a $500 investment into the fund would be $1396.98 with a $350 carry-forward loss credit that could theoretically offset taxable investment gains elsewhere in a portfolio. If there was a unicorn or two, the returns could be significantly higher. If an investor did this for 25 years and then put the redemptions in the S&P, the end value would be $88,296.
This would also provide a pipeline of badly needed capital to small businesses when they need it the most. Ask any proprietors who started from scratch how much better their life would have been if they had $50-100,000 extra in their early days. The impact would be transformational and many businesses that failed wouldn’t have. We know that most job creation happens in small businesses, so this would help employment too.
Of course, there are incredible complications to an idea of this type. It would require vigilance against fraud. It would take a significant amount of work to make a structure that would foster success for these businesses. It would also require bipartisanship at a time when there’s not much of it. But it could be done, and democratizing capital markets would be very good for all of us.
