Private Investments in 401(k)s and the Consumer Confidence Disconnect

Peter and Jeff dig into the push to bring private investments into 401(k)s and what investors should know before jumping in. They also unpack the disconnect between falling consumer confidence and continued spending — and what it could mean for the markets. Plus, get their tips of the month.

Hosted by Creative Planning’s Director of Financial Planning, Jeff Stolper, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!

Important Legal Disclosure:

creativeplanning.com/important-disclosure-information/

Have questions or topic suggestions?

Email us @ podcasts@creativeplanning.com

Transcript:

Jeff Stolper: I’m Jeff Stolper, Director of Financial Planning at Creative Planning, and with me is Peter Mallouk, President of the firm, and we are Down the Middle.

Today we have two topics. First, we’re talking about private markets and those moving into retirement plans, things like private equity, private credit and other similar funds that have traditionally been reserved for institutions in the very wealthy. We’re now seeing a real push to make them available inside of 401(k)s. That raises a number of practical questions that we’ll cover. And then second, consumer confidence has been declining. Surveys show people are feeling less certain about the economy, their job and their finances, but spending doesn’t always follow suit, and we’re seeing that today. The gap between what people say and what they do is worth digging into. So we’ll look at that sentiment, where it falls short, and private markets in the 401(k)s.

So, Peter, tell us more about the idea of including these in 401(k)s. It’s getting a lot of press.

Peter Mallouk: So, Jeff, let’s start with what private markets are. So almost all investing, you’re an owner or a lender, so most of us are familiar with the stock market. You can buy your little share, ownership in a company that’s publicly traded. Nike, Google, Facebook, McDonald’s, Disney. If you like the company, you buy some shares; you own part of the company. Most of us are familiar with the bond market. You lend money to the federal government. It’s a Treasury bond. You lend money to, say, a county, it’s a municipal. You lend money to a corporation, it’s corporate bond and so on. The private version of that are the private markets. So just like there’s publicly traded stocks, there’s private equity where a group of people get together, form a fund and run around and buy part or all of private businesses.

Private businesses are a huge part of the economy. If you look at 50 years ago, 30 years ago even, there were maybe 8,000 publicly traded companies. Today, it’s almost cut in half. The world has gone private. There are thousands and thousands and thousands of big private companies now. Think about Anthropic and OpenAI. These are trillion-dollar companies that are private, but also there’s all kinds of private businesses that are, have 100 million or, or a billion in revenues and have just decided not to go public because they don’t wanna deal with quarterly earnings calls and all the stuff that surrounds being a publicly traded company. So when they want to sell or they want investment, they might go to a private equity fund and trade some of their shares for capital, for money. So just like you can go buy Nike, you could go invest with a private equity company like a Carlisle or a TPG or something like that, and they will then, in turn, go buy private businesses for you.

And there are also private credit funds. Those have been a lot in the news lately because some of them are not doing so well. Some of them are doing pretty well. And these private credit funds raise money from investors and then go lend it to private businesses because the private businesses, they can’t go to a bank and get a $500 million loan, and they also can’t issue bonds because they’re not publicly traded. So they go to the private credit markets. Now we know wealthy families love private investments. So if you’ve got a family with $25 million and up, it’s not uncommon for 20%, 30%, 40% of their portfolio to be in private equity and private credit, sometimes other things like private real estate. There’s a million private investments, but, basically, private equity and private credit and private real estate is the big, big bulk of them.

And why do wealthy families do that? Well, they don’t need the liquidity. You know, when you invest in a private equity fund, the investment might be seven years or longer because they go, “Hey, we’re gonna go invest in a bunch of private businesses. We can’t let you hit a computer button and sell because we can’t just go sell private businesses at 2:00 next Thursday because you feel like it.” So you can sell your Nike shares because it’s publicly traded whenever you want, but you can’t sell your private equity investment whenever you want. So there’s illiquidity there. Well, a wealthy family doesn’t need liquidity. They already have cash and plenty of money. And so they expect a higher return, and they’re willing to give up liquidity.

Now, there are regulations in place that protect people that have less than a certain amount of money, whether it’s a million dollars, which is what we call an accredited investor, or $5 million, which is what we call a qualified purchaser, where the government comes in and says, “Hey, if you don’t have this much money, we don’t really trust you to invest in these investments. We’re worried that you’ll get taken advantage of, you’ll wind up in investments that are illiquid, and then you won’t be able to get out of them, and it won’t work out for you. So to protect you, we’re not letting you buy these things.” Well, the Trump administration, and some say because of private equity pressure, the Trump administration said, “Hey, this isn’t fair. Everyone should be able to invest in whatever they want. The rich are getting richer because they can invest in all these private investments. Everybody else can’t. We’re calling this the democratization of private investments. Everyone should be able to do it. And we’re gonna say if you pass a little short form quiz, you can go ahead and invest in these private investments.”

Because of that, you now see these private funds trying to work their way into 401(k) plans, where you might have a business and you’ve got somebody that’s making $80,000 a year, but they wanna buy private equity and they buy it in that 401(k) plan. These are being structured in ways that provide a little bit more liquidity often. Some would argue the 401(k) plan doesn’t need liquidity because even if you’re 30 and you put $50,000 in private equity, well, you can’t take the money out of many retirement plans without penalty until you’re 59 1/2. So what’s the problem anyway? You should be in private investments.

So two sides to this argument. One side is, “hey, everyone should be able to invest in this. It shouldn’t just be for the wealthy.” There is a higher expected return. That’s the only reason anybody ever invests in a private investment is they expect a higher return. And the other side of it is, “Give me a break. The private equity, private credit funds are trying to take advantage of everybody.” That’s the whole long saga about what’s happening, but it’s not gonna be long before we see these private investments embedded in all sorts of 401(k) plans.

Jeff: So somebody opens up their retirement plan on whatever website they’re using, whatever provider it’s through, and they see those private investments listed for the first time ever. What questions should they be asking, or what should they look at as they consider, “Is this private equity fund right for me or the right one at all?”

Peter: WellI think first you gotta ask yourself, do you really think you’re gonna get a better return? Do I believe that private investments will maybe do better than public investments over long periods of time? Yes. I personally own private investments. Most of our family offices own private investments. Most Creative Planning clients coming in are purchasing private investments. It adds complexity for us; it adds complexity for the client. The only reason we’re doing is we expect a better return, but not all private investments are the same. And if it’s showing up in the 401(k) plan, it might have higher fees. It might have more rights to withdraw money, which might impact expected return. I think you really have to get advice from somebody before you put money in one of those private investments.

It’s not as easy as what I tell young people, just go throw it all in the S&P 500 until it gets to a certain amount, then add an international index ‘til it gets to a certain amount. You can’t just say that about private investments. You really have to look at what is the private investment, what’s the expected return, what are my rights to take the money out and what are the fees before you decide if it makes sense. If that’s too complicated, that’s fine. Buy the S&P 500 and an international index until your account gets well into the six-figure range.

Jeff: You can certainly have a really, really good outcome still over the long term investing just in the S&P 500. Yeah, maybe the private equity thing is the bright, shiny new object, but I totally agree. It merits further investigation before totally dumping 100% of your allocation into that.

Peter: That’s right.

Jeff: Second topic here around consumer confidence, and it ties a little bit in with the first around private investments and just how they perform, private markets in general. But consumer confidence is something that many people look at. I know the Federal Reserve looks at it. I know that economists generally look at it and how it plays within the market. So talk us through a little bit where consumer confidence stands today, and then is that an indicator for the future market?

Peter: It’s fascinating to me because we get these surveys to ask typical people, “do you feel positive about the future of the economy?” And right now is at one of the lowest points in history. Now, who knows why? It could be everything on the news is negative, right? AI agents on the loose, and both political parties, pretty nasty. You’ve got wars all over the world. We’re in conflict with everybody everywhere all the time. It seems like, I mean, it’s hard to watch or listen to 15 minutes of news and go, “Okay, at the end of that I feel better.” How can anyone feel better after 15 minutes of that?

So I think consumer sentiment is very low, but the good news is, as I wrote about in my first book, “The Five Mistakes Every Investor Makes,” the University of Michigan’s really known for doing these consumer sentiment surveys. And when they are at their lowest, when consumers feel the worst, is when the market returns tend to be the best. And so I don’t put a lot of stock in these surveys.

Jeff: Have you ever looked at the actual survey or do you know how they administer it?

Peter: No idea.

Jeff: I was curious. I looked this up. It is a five-question thing that the University of Michigan sends out. They get a thousand responses and then aggregate the results. And that’s one of the two leading indicators for consumer confidence. So it’s a very simple thing. And to take it a step further, people are questioning it more because they just moved from doing that over the phone. Now they moved it to be online and people are questioning that too. So it’s very interesting. This massive indicator at its core is just so simple.

Peter: Well, I think that probably gives it more credibility to me that it’s simple and not overly complicated. I think the reason these aren’t good indicators is if people think things are bad, what’s gonna happen if things turn a little bit positive, right? The market is gonna continue to do well. Whereas if everyone thinks everything is perfect, well, that’s all priced into the market already. And so I think it’s a counterintuitive result, you know, counterintuitive way of looking at it.

Jeff: My sneaking suspicion is fourth quarter holiday season, that consumer confidence isn’t going to correlate to actual spending.

Peter: I would agree.

Jeff: All right, let’s move into our tip of the month. Peter, what do you have for us?

Peter: All right. It’s time to start thinking about taxes. If your income is lower than expected, have a conversation with your CPA and figure out, does it make sense for you to potentially convert your IRA to a Roth IRA? This is something people talk about all the time. It doesn’t make sense for a lot of people, but especially if you find yourself dropping into a very low bracket, you can convert money that you’re going to have to pay income taxes on later into a tax-free account. What’s your tip of the month, Jeff?

Jeff: We’re entering open enrollment season, both for those on Medicare and those actively employed. October 15 to December 7 you’ve got open enrollment for Medicare. And each year from your provider, you’re gonna receive an annual notice of change. I’m challenging you to actually look at that annual notice of change.

So make sure, first, are your prescriptions, are they still covered? Your doctor, is that individual still on the plan? They can change these things from one year to the next. So it’s really important either to assess that on your own or to find someone that can give you really great advice on the plan that you have.

For those that are still actively working, and you’re about to enroll as well, for our plan, I know they make it incredibly easy. It’s pre-filled with your selection from last year. Again, make sure you’re actively looking at that. Is your plan still appropriate for your family? Maybe you had some kind of health change intrayear. So make sure you’re looking at that. This is also the time when you can update something like a 401(k) contribution. So make sure you’re getting the full employer match for that too.

Peter: Good advice.

Jeff: I’m Jeff Stolper, Director of Financial Planning at Creative Planning. With me has been Peter Mallouk, President of the firm, and we are Down the Middle.

Disclosure: This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.