The Bernie Sanders and Elizabeth Warrens of the world have long complained about how the rules in Washington and on Wall Street are rigged in favor of the rich.
Well there is one federal policy that absolutely does benefit those with higher incomes over working class Americans.
The wealthy have long had almost monopoly access to the most lucrative investment opportunities, including private equity, private credit, crypto assets, and real estate investment trusts. These assets have been legally closed off to the middle class and lower income retirement accounts as “too risky.” This has enabled higher income Americans and “accredited investors” to earn higher returns on their money.
As the table below shows, from 2003 to 2023, the returns on these alternative investment vehicles have outperformed traditional “safe” 401k investments:
Annual Rate of Return on Capital Market Investments, 2013-23
Private Equity 15%
Public Equity (stocks) 10%
Real Estate 10%
Bonds
Total 401k Average Returns 8%
Source: American Investment Council, 2024.
That gap is costing retirees tens of thousands of dollars or more of lost retirement income.
Good news. In August, Trump signed an executive order called The Democratizing Access to Alternative Assets for 401(k) Investors. This allows defined contribution benefit plans to invest some of their assets in the $12 trillion market of private equity, private credit, and digital assets. There are some 90 million Americans with defined contribution retirement plans, such as 401(k)s.
Unfortunately, there is still one remaining obstacle to implementing this order: trial lawyers. The Department of Labor will soon issue formal rule making under the 1974 ERISA law and these rules must prevent predatory and abusive lawsuits, or employers won’t offer these expanded plans to their workers.
Democrat-aligned trial attorneys have spent years filing frivolous class action lawsuits against employers who try to innovate in retirement plan design. Their goal isn’t to protect workers. Rather, by gatekeeping regular workers from the highest-return investments, these activist attorneys have weaponized the legal system and extracted huge settlements —multi-million dollar settlements — that line their own pockets. The trial lawyers get rich from these class action lawsuits and the retirees typically get peanuts.
These lawsuits have created a climate of fear that discourages businesses from offering diversified, high-return portfolios to their employees.
The White House economists estimate that expanding access to private assets in 401(k)s could increase lifetime retirement income by thousands of dollars annually for younger workers and generate $35 billion in GDP gains. Why wouldn’t we do this?
There are clearly risks with PE, but diversified portfolios for long term investments lower these risks. Also, many of the investments that the government has classified as “safe” investments, such as mortgage-backed securities – were precisely the investments that lost trillions of dollars in the 2008 housing crash. How was that safe? Bonds are supposed to be the least risky assets, but they LOST value in the high-inflation Biden years.
The Department of Labor needs to write clear rules that provide a safe harbor for employers who offer professionally managed funds, except in cases where there is no evidence of improper or illegal activity by fund managers or potentially unscrupulous company executives. Protecting plan sponsors from abusive litigation will open the doors wider to higher retirement incomes for today’s workers.
Americans want to have the best life they can with financial security in their retirement years. The Trump plan opens these gates to sharing America’s wealth in ways to lift ALL retirement boats. Just put a muzzle on the trial lawyers, Mr. President.
Stephen Moore is a co-founder of Unleash Prosperity and a former senior economic advisor to Donald Trump. His latest book is “The Trump Economic Miracle.”
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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