STEVE INSKEEP, HOST:
President Trump wants to make it easier for retirement plans to include private equity investments. What's that about? Our colleagues from The Indicator, Darian Woods and Paddy Hirsch, have more on an executive order the president signed on Thursday.
PADDY HIRSCH, BYLINE: Investment plans offered by companies to workers, like 401(k)s, typically only invest in highly regulated, publicly traded securities.
DARIAN WOODS, BYLINE: Stock traded on a public exchange, like the New York Stock Exchange or the NASDAQ, or bonds regulated by the Securities and Exchange Commission. The reason? ERISA.
ANITA MUKHERJEE: So it stands for the Employee Retirement Income Security Act.
WOODS: This is Anita Mukherjee. She's an associate professor in the Department of Risk and Insurance at the Wisconsin School of Business.
MUKHERJEE: ERISA is really important. It's the foundation of a lot of what protects our 401(k) investments for workers today.
HIRSCH: ERISA doesn't say investment plan providers can't invest in the racier end of the market. If it wanted to, NPR could give you, Darian, the option to put your money into private equity, but only if it met certain conditions.
MUKHERJEE: Employers and plan administrators must act solely in the interest of participants and manage plans prudently.
HIRSCH: Ah, yes. The prudent-man rule.
MUKHERJEE: Prudence - really, it's about doing what's right for the employee.
WOODS: Could that include letting me roll the dice on private equity?
ANNAMARIA LUSARDI: This might be more appropriate for young people.
HIRSCH: Annamaria Lusardi is a senior fellow at the Stanford Institute for Economic Policy Research. She says younger workers, who might wish to be more aggressive with their investments, might welcome the chance to have a wee flutter in the private market.
WOODS: Annamaria says private equity funds are inherently risky because of the kinds of companies these funds invest in.
LUSARDI: We are talking about firms that are not traded in the markets, and these can be smaller firms. They could also be firm that are more likely, potentially, to fail.
WOODS: Private companies aren't subject to the same kind of regulation as public firms. They're less transparent, so investors don't have the same ability to assess what their prospects are compared to public companies.
HIRSCH: Yeah, and then there are all of the risks associated with the private equity funds themselves.
LUSARDI: Normally, private equity, you know, require investment to stay from seven to 10 years.
HIRSCH: Yes, you heard that right. Private equity firms lock up your money for years.
LUSARDI: And most importantly, the fees are much higher - 2% for the management fee and 20% of the profit.
WOODS: It's these risks and restrictions and fees, not any laws against private equity, that have kept employers and plan managers from offering private equity as an investment option to their workers. It just hasn't been prudent in their eyes. And, of course, there is the risk that if workers lost a lot of money because a private equity investment went south, they might sue.
HIRSCH: Yeah, and Anita says private equity funds have been lobbying for years to tweak ERISA and nudge the prudence calculation in their favor. Why? Well, because retirement accounts are where all of the money is.
MUKHERJEE: Two-thirds of all employer-based savings are in 401(k) plans.
HIRSCH: Which is where the Trump executive order comes in.
MUKHERJEE: The intention is to really encourage plans to take a step forward in this direction.
HIRSCH: Both Anita and Annamaria say it'll take time for plan managers and employers to figure out just what they can offer and to whom, and how much legal protection an executive order might give them. The guidelines in ERISA may have been softened around the edges, but they haven't been eradicated. Prudence will still be required.
WOODS: Darian Woods.
HIRSCH: Paddy Hirsch, NPR News.
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