Wealth Disparities in Investment Opportunities
Elizabeth Warren and Bernie Sanders have long criticized the systems in Washington and Wall Street that seem to favor the wealthy. There’s a clear federal policy that illustrates this issue: it decidedly benefits higher-income individuals over working-class Americans.
For quite some time, the wealthy have had exclusive access to some of the best investment opportunities. These include private equity, private credit, cryptocurrency, and real estate investment trusts. Unfortunately, these options are often deemed “too dangerous” for middle-class and low-income retirement accounts. This setup has allowed affluent Americans and “accredited investors” to earn significantly higher returns on their investments.
Looking at the data from 2003 to 2023, it’s evident that these alternative investment vehicles outperform the traditional “safe” 401(k) options.
- Private Equity: 15%
- Public Equity: 10%
- Real Estate: 10%
- Bonds: 2%
- Total average returns for 401(k): 8%
Source: American Investment Council, 2024.
This gap has serious implications, costing retirees potentially tens of thousands of dollars in income throughout their retirement. But, there’s a bit of hopeful news. In August, an executive order was signed that aims to democratize access to alternative investment options within 401(k) plans. This is significant because it would allow workers to invest a portion of their assets in a $12 trillion market filled with private equity, private credit, and digital assets. Approximately 90 million Americans are enrolled in defined contribution retirement plans like 401(k)s.
However, there’s still a major hurdle that stands in the way of implementing this order: trial lawyers. The Department of Labor is expected to release formal rules under the ERISA Act of 1974 aimed at curbing predatory lawsuits. If these predatory practices continue, employers might not be willing to offer these expanded investment options.
For years, trial lawyers affiliated with the Democrats have been filing numerous class action lawsuits against companies trying to innovate their retirement plan designs. These lawsuits often prioritize profit for the lawyers, who benefit from substantial settlements, rather than focusing on the welfare of workers. In this scenario, the average retiree is left with very little.
This environment of fear created by lawsuits has made it difficult for businesses to provide their employees with diverse and advanced investment portfolios.
Some economists believe that broadening access to alternative assets in 401(k) plans could add thousands to the lifetime retirement income of many workers. Additionally, it could contribute billions to the GDP. So, why not pursue this opportunity?
While private equity investments do carry some risks, diversifying portfolios for long-term investment can mitigate those risks. Interestingly, many investments that the government categorizes as “safe,” like mortgage-backed securities, resulted in considerable losses during the 2008 crisis. It’s worth questioning how “safe” those truly are. Even supposedly low-risk assets like bonds have lost value in recent economic expansions.
The Department of Labor needs to draft clear rules that protect employers who offer professionally managed funds, as long as there’s no evidence of wrongdoing by fund managers or unethical actions from corporate executives. This protection could pave the way for better retirement income options for today’s workforce.
Ultimately, Americans aspire to a secure financial future during their retirement years. This executive order could make a significant difference by allowing broader access to wealth-building opportunities, enhancing retirement plans for everyone. It’s just a matter of cutting off the roadblocks posed by trial lawyers.
