Trump Effect: The Council of Economic Advisers (CEA) has dropped a paper making the case for a massive change to how Americans save for retirement. They're saying it's time to let defined contribution (DC) plans, like your 401(k), invest in "alternative investments" like private equity. The administration believes this is a huge opportunity for everyone, from plan participants to the entire U.S. economy.
The Numbers:
For your wallet: Younger Americans could see their lifetime income increase by around 2.5%. Even the oldest cohorts stand to gain between 0.5% and 1%. The paper's analysis finds that adding private equity to a portfolio boosts risk-adjusted returns and retirement wealth.
For the country: Giving retail investors access to private equity through DC plans could pump up the GDP by as much as $35 billion, or 0.12%. This is all thanks to reallocating capital and labor from lower-productivity public sectors to the higher-productivity private equity sector.
The Private vs. Public Divide: In a major shift, the number of public companies has fallen by about 55% since 1997, while the number of private firms has jumped by roughly 67%. The paper notes that private companies tend to be "smaller, younger, and fast growing", which is where the real action is.
The Hurdles: So, why aren't we already doing this? The paper points to some of the usual suspects:
The "Accredited Investor" Rule: This rule, which has been around for over 40 years, limits access to private markets based on income and net worth, effectively keeping "high growth private investments to wealthy investors."
ERISA Rules: Fiduciaries of DC plans worry about "legal and litigation risk" under the Employee Retirement Income Security Act of 1974 (ERISA). Unlike defined benefit (DB) plans, which are more insulated, DC plans are more susceptible to lawsuits related to investment choices.
The Bottom Line: The CEA is making a bold claim: opening up private market investments to everyday Americans via their 401(k)s is a "double dividend". It not only boosts an individual's lifetime income but also fuels the American economy by efficiently reallocating capital. This is a win-win that puts the financial power back into the hands of the people and reinforces the nation's economic engine.