Jerry Schlichter, a St. Louis-based attorney, is preparing to challenge the increasing efforts by private equity firms to gain access to the $7.3 trillion 401(k) market, arguing that such investments pose significant risks to retirement savers. Schlichter, known for his successful litigation against major financial institutions over excessive 401(k) fees, views the influx of private equity as a modern frontier for potential abuse.
The push to include private equity in 401(k) plans gained momentum following an executive order signed by former President Donald Trump in August 2020. This order aimed to broaden investment options within retirement plans, potentially opening the door for alternative investments like private equity, which traditionally have been available only to institutional investors and high-net-worth individuals.
Private equity firms are attracted to the 401(k) market due to its sheer size and the potential for substantial management fees. Yet, concerns are mounting about the suitability of these complex and illiquid investments for average retirement savers. Unlike publicly traded stocks, private equity investments are not easily bought or sold, and their valuations are often less transparent.
Schlichter’s firm, Schlichter, Bogard & Denton, is already assembling legal teams and conducting research into potential fiduciary breaches related to private equity offerings in 401(k) plans. He argues that plan sponsors have a duty to ensure that all investments are in the best interest of participants, and that the risks associated with private equity may not be adequately disclosed or understood by many investors. “We’re looking at the potential for conflicts of interest and whether these investments are truly aligned with the needs of retirees,” Schlichter said in a recent interview.
The potential for litigation is not lost on the financial industry. According to a report from The Wall Street Journal, plaintiffs’ lawyers are actively preparing to scrutinize any private equity offerings in 401(k) plans, anticipating a wave of lawsuits if participants suffer losses. This anticipation stems from the inherent complexities and lack of transparency often associated with private equity investments.
Critics likewise point to the potential for inflated valuations and the difficulty of assessing the true performance of private equity funds. A recent article in planadviser questioned whether private markets present a “lucrative opportunity ‘fraught with peril’,” highlighting the challenges of due diligence and the potential for hidden fees. The lack of readily available data and the long-term nature of private equity investments make it tough for plan participants to monitor their holdings and assess their risk exposure.
The debate over private equity in 401(k)s comes as the retirement industry faces increasing pressure to deliver higher returns in a low-interest-rate environment. Proponents argue that private equity can offer the potential for outsized gains, but opponents warn that these gains come with significant risks that may not be appropriate for all investors. The Department of Labor has yet to issue comprehensive guidance on the inclusion of private equity in 401(k) plans, leaving a degree of uncertainty for plan sponsors and participants.
