Retirement planning is a topic of much discussion right now—as it should be. Looking ahead and providing for the years to come should be part of everyone’s financial strategy regardless of the path they choose to do so. In part, this stems from the ever-changing regulations and options around retirement planning, which periodically present new options for the wise investor.
One such change came earlier this month when Executive Order 13924 “Regulatory Relief to Support Economic Recovery” went into effect. A measure intended to innovate and energize the retirement savings landscape, the executive order loosens the de facto restrictions on private equity investments for companies with 401(k) retirement plans. It does so by allowing companies to offer access to private equity investment for retirement provided that it is done in a responsible way via diversified instruments such as target-date funds. This change in regulatory standards opens a plethora of new options for retirement investors with 401(k) plans. However, as with any new investment opportunity, careful planning and expert advice are necessary in order to best take advantage of the options available.
While private equity investments are a longstanding tool for retirement investment planning and are often central to private investment portfolios, they have rarely figured into the investment funds used by defined contributions plans. These investment funds—which include 401(k) plans—generally use pooled investment opportunities such as mutual funds, bank collective investment funds, and insurance company accounts. The current changes are aimed at “private equity investments offered as part of a professionally managed multi-asset class vehicle structured as a target date, target-risk, or balanced fund.” These would include target-date funds, which invest in multiple assets from a variety of classes. While this greatly expands the investment opportunities available for professionally managed funds such as 401(k) plans, it does not authorize private equity investments for direct investment on a standalone basis. That limitation aside, the executive order expands the potential investment pool by opening up as much as $400 billion in new assets from the $6.5 trillion 401(k) market.
What to Do Next?
According to US Secretary of Labor Eugene Scalia, these changes will “level the playing field for ordinary investors” seeking the best options for their retirement planning investments. It undoubtedly does so; traditionally private equity funds have only been accessible by wealthy private investors and financial institutions. The risks, complexity, and liability involved had left them beyond the reach of ordinary investors working through managed funds and pooled investments. Approached properly, private equity investments are a potentially powerful tool for 401(k) managers and investors alike. However, as with all sudden and sweeping changes, foresight and clear thinking are necessary if one wishes to make the most of the opportunity.
Get the Guidance You Need
This is yet another huge change in a time defined by huge changes, and for many investors, it may seem daunting. At OmniStar Financial, our team of professionals is bringing their wisdom and experience to bear whether we’re working with your retirement planning or other financial needs. If you have questions about your 401(k), get in touch—we’re here to illuminate the blind spots.