The Trump administration’s first few months have been chaotic, to be sure, but there has been a certain consistency when it comes to crafting policies to benefit specific industries.The latest favor is one for the private equity industry. They lobbied for an executive order giving them greater access to the trillions of dollars invested in everyday retirement accounts, as well as protections for employers who fear being sued if they offer plans with high fees. While it’s an obvious strategy to deliver private equity giants  desperately needed cash, it’s not clear that it will work. 

The Trump executive order – which had been rumored to be in the works for weeks – directs the Labor Department and the Securities and Exchange Commission (SEC) to provide guidance to employers and plan administrators to include private equity (PE) investments in workers’ 401(k) plans. This has long been one of the industry’s top priorities, and it’s not hard to see why – there is $12.4 trillion in retirement accounts at stake. But significant hurdles remain.

For starters, the whole business is inherently risky. The private equity model involves lining up investors in private funds, and using that money to buy up companies – often with a lot of debt, known as a leveraged buyout. The targeted company is saddled with that debt, and the new PE managers seek to dramatically slash costs. After raking in substantial management fees, the owners seek to exit the deal within a few years. Unlike most publicly traded companies, PE funds operate with little in the way of transparency or accountability. 

To many wealthy investors, none of that matters when things are going well. But lately, the PE industry has been struggling; it has underperformed the S&P 500 the last five years. Some large PE funds are having trouble selling the companies in their portfolios and returning cash to their investors – in part because they have spent years overvaluing those companies. On top of that, exit deals have slowed down considerably, and higher interest rates have increased the cost of maintaining all that debt. 

All of that means that private equity is losing its appeal to investors. This year, New York City’s pension system sold off $5 billion of its PE investments across 125 funds, after a year of meager returns. So why would it make sense for individual investors to jump in now? Even in a better investment environment, it hasn’t proven to be very attractive. During the first Trump administration, the Labor Department issued guidance giving employers the ability to adopt 401(k) plans that included private equity investments. But there has been little take-up. Less than 10 percent of retirement plans offer any kind of alternative investments, and investments in PE are available in only 2.4 percent of them. 

It’s not hard to see why. For decades, major pension funds have invested billions in private equity funds. According to PitchBook’s Pension Fund Tracker, the 50 largest pension funds returned an average 7.4% return over the past decade. A plain vanilla portfolio (60% stocks and 40% bonds) returned 8.1% over the same period. We see a similar trend with university endowments; the top 50 university endowments invested just over $800 billion in various “alternative” private assets – a category that includes private equity buyout funds and private credit. Their return? 8.3 percent – not much different than a plain vanilla mutual fund. 

And there is another factor: Investment advisors and employers are afraid of being sued over high fees and disappointing returns from PE investments. If advisors do not have confidence such investments will deliver strong returns, they will likely steer clear. Trump’s executive order did not include an explicit weakening of employers’ fiduciary responsibility. There is no safe harbor in the order that protects employers from being sued by workers if PE plans underperform.

It’s clear that private equity needs the kind of cash infusion that could come from retirement accounts. Institutional investors are getting out, fundraising is down, and the private equity industry’s assets shrank for the first time in decades. It’s clear that the Trump administration wants to do the industry a favor, but the industry may not have gotten all it asked for. In the end, employers may be hesitant to expose millions of retirees to risky, opaque investments that, for workers, may be a recipe for disaster.