Report Warns Against Risky Private Equity Investments for Pensions

Potential Risks of Private Equity Investments in Retirement Plans Highlighted in New Report

WASHINGTON—A recent report by the American Federation of Teachers (AFT) and Americans for Financial Reform Education Fund (AFREF) scrutinizes the perceived benefits of private equity investments in pension funds. The report argues that such investments may not provide the superior returns often claimed by industry proponents and could pose significant risks to retail investors.

With the Trump administration contemplating an executive order to explore the inclusion of private market investments in 401(k) plans, the stakes for retirement savers are considerable. The private equity sector, eager to access new revenue streams amid underwhelming performance and growing skepticism among institutional investors, has been lobbying for this shift.

The report warns that although financial insiders might benefit, millions of retirement savers could face increased risks and fees in products lacking essential investor protections. It suggests that workers could end up with the least favorable investment outcomes within this market.

Proponents of private equity argue that their leveraged buyout strategies are necessary for achieving high returns and that expanding into the U.S. retirement system would benefit more workers. However, the data analyzed by AFT and AFREF presents a contrasting viewpoint:

• Private equity returns have consistently declined over the past two decades.
• Florida pensions reportedly could have gained an additional billion dollars from 1988 to 2011 had they avoided private equity investments.
• Private equity executives are known to manipulate asset value reporting.
• Despite claims of stability, actual asset value volatility in private equity matches public markets.
• The internal rate of return, a common performance metric for private equity, is often manipulated.
• Fee structures, whether direct or indirect, are susceptible to manipulation.
• High fees can undermine the financial health of portfolio companies, further affecting investor returns.
• The benchmarks used by private funds do not accurately reflect their portfolios.
• Private equity secondary markets indicate that sellers incur significant losses, raising questions about asset values.

“Private equity has a track record all right: one of extracting huge fees from our members’ retirement savings and with zero transparency and disappointing returns,” AFT President Randi Weingarten commented. “Rather than help workers, the Trump administration is planning to make matters worse by opening up individual retirement accounts to industry vultures.

“The AFT fights every day to uphold workers’ retirement security. But this report reveals that private equity is simply not worth the risk, and that its growth will make it harder, not easier, for working people to retire with dignity and grace. It’s why we’re calling on pension funds and 401(k) plan administrators to demand information on fees, evaluate risk and deeply interrogate the industry’s glitzy, but wildly misleading, pitch.”

The report suggests policy measures to safeguard pension funds from the potential negative impacts of private equity investments. These measures include:

• Exercising market power to obtain detailed information on fees, risks, and returns.
• Implementing formal investment guidelines and enforcement frameworks for private fund management.
• Exploring alternative investments, such as internally managed private market investments.

“Private equity executives have enriched themselves by the billions, taking high fees and other charges from working people’s hard-earned retirement savings in pension funds. Now they want fees from the trillions of dollars in individual retirement accounts, putting millions of more people at risk,” said Lisa Donner, co-executive director at Americans for Financial Reform Education Fund. “Meanwhile, private equity is harming workers and communities through abusive practices that too often drive businesses to bankruptcy, reduce quality of care while also increasing costs in healthcare, ratchet up the price of housing, and more. To stand up for working people and retirees, the administration, regulators and Congress need to rein in these abuses, not enable and incentivize their further growth.”