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--:-- Oyin Adedoyin: Welcome to The Journal, our show about money, business, and power. I'm Oyin Adedoyin.
--:-- Oyin Adedoyin: Today, we're talking about 401ks and the potential for everyday Americans to invest their retirement savings in assets outside of public markets. Joining me is my colleague, Anne Turgesen. Anne, thanks for being here.
--:-- Anne Turgesen: Thanks for having me, Oyin.
--:-- Oyin Adedoyin: So, let's start with some history. Before the 401k became mainstream, there was the pension. Anne, can you tell me a little bit about what the traditional pension was like and how it worked?
--:-- Anne Turgesen: Sure. So, the pension was sort of a forced savings mechanism. Employers funded pension funds that often covered living expenses and retirement for employees. Here's an old General Electric ad.
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--:-- Anne Turgesen: In this ad, it says that I only contributed a small part of my earnings toward my pension. The General Electric Company contributed too, even more than I did. And as long as you stayed at the company, when you retired, you were basically guaranteed a pension.
--:-- Oyin Adedoyin: That sounds great. But, of course, there were some downsides. Employees were stuck at one company if they wanted to see their full pension after retirement.
--:-- Anne Turgesen: That's right. And for employers, pensions were expensive because they were the ones funding most of the pensions, and generally they had to do so throughout the employee's retirement.
--:-- Oyin Adedoyin: In the 2000s, a new law made a different type of retirement plan more popular than ever, the 401k. Can you tell me more about that?
--:-- Anne Turgesen: Sure. New accounting rules came in in about 2006 that increased the funding requirements and made the amount that employers had to put in every year less predictable. So employers really just backed away from pensions.
--:-- Oyin Adedoyin: And I think that, you know, certainly as pensions became something that employers were less willing to offer, the 401ks shifted into the mainstream.
--:-- Anne Turgesen: That's right. 401ks were attractive because the investment accounts came with certain tax advantages. But they weren't initially designed with everybody in mind.
--:-- Oyin Adedoyin: That's fascinating. So we're all just walking around with these accidental retirement nest eggs.
--:-- Anne Turgesen: Yeah, kind of. A 401k works like this. An employer hires a 401k administrator, like Fidelity and Vanguard, and working together, they offer employees a set of investment options, often called a 401k menu.
--:-- Oyin Adedoyin: Then, employees decide, based on their appetite for risk, what kind of portfolio they want. More stocks? More bonds? It's up to the employee.
--:-- Anne Turgesen: And if the employee doesn't decide, the employer picks an investment option for them. And unlike pensions, 401k funds offer a lot more flexibility.
--:-- Oyin Adedoyin: The big advantage of the 401k is that it's portable. And when you leave the company, the money still is yours.
--:-- Anne Turgesen: And you don't have to stay at a company for 25, 35 years in order to earn an adequate retirement income.
--:-- Oyin Adedoyin: And I think that for employees, I think that is a huge benefit.
--:-- Anne Turgesen: Another big benefit is that 401ks can be set up for passive investing because many people, including some of our listeners, have very little idea how their 401k works.
--:-- Oyin Adedoyin: I've been participating in 401ks for my past and current companies for probably the last decade now, and I really could not tell you a single thing about my 401k investment portfolio.
--:-- Anne Turgesen: I'm not exactly sure where I'm invested for my 401k. I always assumed that the 401k meant $401,000.
--:-- Oyin Adedoyin: But, of course, that's not the case.
--:-- Anne Turgesen: Some people are very actively involved in their 401ks. They know a lot about the stock market. They get the right mix of stocks and bonds. And they let it go.
--:-- Oyin Adedoyin: But I think these days the vast majority of people are very hands-off.
--:-- Anne Turgesen: One way that 401ks allow people to be hands-off is through something called target date funds.
--:-- Oyin Adedoyin: When that 2006 law came along, it also sanctioned target date funds as the kind of receptacle for when you automatically enroll someone, payroll deductions will go into a target date fund, which is a mixture of stocks and bonds.
--:-- Anne Turgesen: Say for example you want to retire in the year 2065. You find a target date fund for that year. It starts out with riskier assets and reduces the risk over time.
--:-- Oyin Adedoyin: As that 25-year-old stays at the company, gets older, the target date fund is going to shift them so that they're more heavily exposed to bonds over time, less heavily exposed to stocks.
--:-- Anne Turgesen: So when they get close to retirement, they might have more like a 50-50 portfolio inside the target date fund.
--:-- Oyin Adedoyin: As the stock market has gone up in recent years, 401k investors have raised their exposure to stocks, which are more volatile than bonds.
--:-- Anne Turgesen: So interestingly, we have seen the percentage exposure to the stock market kind of inch up over the last couple years.
--:-- Oyin Adedoyin: I don't think that's necessarily unexpected.
--:-- Anne Turgesen: I mean, for one thing, when the stock market does really well, often people forget to rebalance and take some money out of stocks and put it into bonds.
--:-- Oyin Adedoyin: But we have seen 401k investors taking more risk, stock market risk, in recent years.
--:-- Anne Turgesen: And now the Trump administration is paving a way for 401k investors to get access to potentially riskier investments.
--:-- Oyin Adedoyin: That's next. We'll be right back.
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--:-- Oyin Adedoyin: Welcome back to The Journal. We're talking about 401ks and the potential for everyday Americans to invest their retirement savings in assets outside of public markets.
--:-- Anne Turgesen: That's right. Since 401ks are often the main ways that people save for retirement, they are tightly regulated.
--:-- Oyin Adedoyin: That's one of the reasons they're most typically made up of stocks and bonds, and why alternative assets like crypto or private equity are not usually included in 401ks.
--:-- Anne Turgesen: But this guidance has started to shift under President Trump.
--:-- Oyin Adedoyin: During the first Trump administration, there was a labor department guidance.
--:-- Anne Turgesen: So this guidance basically said, it's OK with us if you want to offer private equity, but we want you to do it within a target date fund or some other kind of diversified fund.
--:-- Oyin Adedoyin: And then when Trump was reelected, private equity, private credit, private real estate, asset managers, there was a lot of momentum among all of those players to bring more private market exposure to the 401k plan.
--:-- Anne Turgesen: And then recently, the White House issued an executive order ordering the Labor Department to work with other agencies to make this possible.
--:-- Oyin Adedoyin: And so the executive order just directs the Labor Department to consult with other federal agencies to figure out what kind of changes are needed to make it easier for private markets to be adopted within 401ks.
--:-- Anne Turgesen: And I think it also sends a signal, right, to employers with 401k plans.
--:-- Oyin Adedoyin: Oh, gee, you know, the government is sort of signaling that this is OK.
--:-- Anne Turgesen: Anne says getting into 401ks would be great for private markets. The industry really wants in to 401ks.
--:-- Oyin Adedoyin: I think the private markets industry sees a $12 trillion pot of money sitting there in 401ks and it sort of thinking, well, gee, you know, why can't we get into that?
--:-- Anne Turgesen: So what the case they making?
--:-- Oyin Adedoyin: They make the argument that you know, like say with private equity for example, you have to lock your money up for X number of years with those funds.
--:-- Anne Turgesen: You can't just put your money in and then tomorrow, oh, I forgot. I need that money because I have to make a down payment on a house. I'm going to pull it out. No, you can't do that.
--:-- Oyin Adedoyin: So with a 401k, that money is meant to be locked up, right, for three, four decades, you know, if you're 20 years old and 21 years old and you're starting out at a company, you're looking at four decades in which that money is, at least in theory, off limits to you.
--:-- Anne Turgesen: So that is long-term money.
--:-- Oyin Adedoyin: So the private equity, private markets industry sees that as a very good fit.
--:-- Anne Turgesen: And already, some big names are teaming up.
--:-- Oyin Adedoyin: State Street, a 401k asset manager, has teamed up with the private equity firm Apollo Global Management to launch a target date fund.
--:-- Anne Turgesen: BlackRock is also working on a target date fund that includes private equity.
--:-- Oyin Adedoyin: But Anne says that even if these players are on board, it ultimately comes down to whether employers want to include these assets in their 401ks.
--:-- Anne Turgesen: A lot of employers, certainly big companies, even medium-sized companies, are very wary about getting sued.
--:-- Oyin Adedoyin: That's because, in the past, some companies already offered private equity in their 401k plans and got sued.
--:-- Anne Turgesen: Intel was one of those companies.
--:-- Oyin Adedoyin: Why did Intel get sued?
--:-- Anne Turgesen: It's really focused on fees. Private equity, private credit, private real estate. These types of investments tend to come with significantly higher fees than just the S&P 500 index funds that are so dominant in 401ks right now.
--:-- Oyin Adedoyin: Intel eventually won its case.
--:-- Anne Turgesen: But the issue of higher fees in 401ks remains a big concern.
--:-- Oyin Adedoyin: Because the fees are so high, the investments need to earn higher returns to justify those fees.
--:-- Anne Turgesen: Almost inevitably, an employer that adds some kind of private equity, private markets exposure to its target date fund is going to pay more for that target date fund.
--:-- Oyin Adedoyin: That means the employees are going to pay more for that target date fund.
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--:-- Oyin Adedoyin: Welcome back to The Journal. We're talking about 401ks and the potential for everyday Americans to invest their retirement savings in assets outside of public markets.
--:-- Anne Turgesen: One thing I do know is that I do not want my 401k to start investing in any private market or crypto-based investment vehicles.
--:-- Oyin Adedoyin: But Anne has talked to people who are excited about the growth opportunity that comes with adding more investment options to their 401k.
--:-- Anne Turgesen: People who argue in favor of adding some private markets exposure to the 401k, they view it as a positive, right?
--:-- Oyin Adedoyin: They're saying, you know, this sort of age-old argument that diversification is good for investors.
--:-- Anne Turgesen: This is sort of the logical extension of it.
--:-- Oyin Adedoyin: And, you know, to the extent that we can add more diversification to people's 401ks, they can benefit, right?
--:-- Anne Turgesen: And as more and more people hear about private equity, she says they may be more willing to take risks.
--:-- Oyin Adedoyin: There's no safe investment in a 401k.
--:-- Anne Turgesen: But the idea is that if you mix these investments together, you can have some offsetting effects that are going to be helpful to the investor.
--:-- Oyin Adedoyin: Yeah, we can't really predict the future, but it's like, I guess, hedging our bets.
--:-- Anne Turgesen: Hedging bets is exactly the idea.
--:-- Oyin Adedoyin: That's all for today, Thursday, August 21st.
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--:-- Oyin Adedoyin: The Journal is a co-production of Spotify and The Wall Street Journal.
--:-- Anne Turgesen: Additional reporting in this episode by Miriam Gottfried.
--:-- Oyin Adedoyin: A big thank you to those who responded to our call out about 401ks.
--:-- Anne Turgesen: Although we couldn't get them all in today's episode, we appreciate you sharing your stories with us.
--:-- Oyin Adedoyin: Thanks for listening. See you tomorrow.
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