Private credit may come to your 401(k). Do you invest?
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President Trump signed an executive order instructing the Department of Labor to reevaluate guidance for employers on incorporating assets like private credit, real estate and crypto into retirement plans.
Why it matters: Private credit is golden child of Wall Street, promising diversification and potentially enormous returns compared to the stock market. But the catch is in the name: private.
- These opaque, illiquid investments could pose risks for everyday investors, especially those betting their retirement savings.
Catch up quick: Private credit lets investors gain exposure to private companies by lending them money instead of buying their stock.
- If you're a company that needs cash, you might turn to nonbank lenders. That's what private credit is. It's high risk, high reward, and often moves independently from the stock market.
Driving the news: Ahead of the executive order, retirement service providers have increasingly been jumping into the private credit pool, with Empower and Wellington pursuing expansion plans.
- And giants in private credit like Apollo, BlackRock and KKR have been clamoring to tap into the over $12 trillion in U.S. defined contribution retirement plans.
What they're saying: "Don't get distracted by shiny objects," Victoria Ferguson, certified financial planner and wealth advisor with Mercer Advisors, tells Axios. "There's a reason why this is only for the affluent."
- She cautions investors to not get caught up in the idea that this is a secret tool of the wealthy. There are higher minimum requirements because it's an expensive strategy.
- There's less regulation and higher associated fees, meaning the people pitching private credit tools make more money off investor interest.
Yes, but: Around 87% of US companies that have over $100 million in revenue were privately owned as of 2023, per a Partners Group report.
- This shift has now made it "no longer socially viable to limit options for retirement savers to just public equity and debt," John Bowman, CEO of the Chartered Alternative Investment Analyst Association, writes in an email to Axios.
Zoom out: OpenAI just had a $500 billion valuation tied to its employee stock sale this week. This is an example of why more novice investors want access to private companies: Companies are staying private for longer, and active retail investors want a chance to get in on the action.
By the numbers: According to data from Empower, one of the firms that provides access to private credit assets, consumers are eager to invest.
- 59% of people say including private investments in retirement plans can help workers build wealth in ways previously limited to the ultra-rich.
- 73% of retirement plan participants say having professionally managed private investments helps level the playing field for novice investors.
The bottom line: If you want risker investment strategies with potentially juicier returns, "your 401(k) is probably not the best place for that," Ferguson says. "You don't want to put your biggest financial goal you will ever achieve at risk."
