The cost of goods and services has gone up over the years, and West Virginians are struggling to save for retirement. One way to make it easier for West Virginians’ nest eggs to grow is to enable 401(k) sponsors to offer more investment options that come with higher returns, even after fees are accounted for.
The first step in ensuring that private-sector employees save for retirement is to encourage the use of tax-advantaged 401(k) plans. A report by Goldman Sachs “finds that the total cost of retirement has been rising at a rate of 4% per year over the last quarter century, far faster than the rate of inflation.” However, “contributing to a sponsored 401(k) could boost savings by 29% by the time a worker hits 65.” Employees who elect to put a fraction of their salary or wages into a traditional 401(k) will see their money grow without having to pay taxes on capital gains or dividends and will only pay income tax when they withdraw money from the plan after the age of 59 ½.
Once an employee has a 401(k) plan, they want to maximize their savings to prepare for retirement. One way to accomplish this is to add private market investments, such as private equity and real estate, as available investment options for a 401(k) plan. These investments may be added to a target-date fund that adjusts its investment asset allocation as the employee approaches retirement age. This adds diversification, higher returns, and predictable income to an employee’s retirement plan.
Private market investments are not a new concept. Public pension funds and wealthy investors have benefited from investing in private markets for decades, while employees in sectors like food services, construction, sales, management, and transportation have been left by the wayside. Workers in the private sector should have access to the same investment opportunities as their public sector counterparts.
The West Virginia Investment Management Board (WVIMB) is continuing to increase its investment in private markets. In fact, it was recently reported that the WVIMB allocated nearly 25 percent of its assets to private markets. Additionally, in 2021, private equity alone saw a 10-year annualized return of 19.7 percent in West Virginia’s public pension funds. If public pensions continue to invest and benefit from private markets, so should any private citizen with a 401(k) plan.
Private sector employers are not prohibited from offering private market investments in 401(k)s, but the threat of frivolous litigation has prevented many employers from expanding investment options for their employees. Frivolous lawsuits, including fiduciary litigation, cost West Virginia households over $2,000 per year here in West Virginia, a substantial number.
To stop these abusive actions, the U.S. Department of Labor (DOL) plans to issue a proposed rulemaking that will provide a safe harbor for private sector employers, including the steps and disclosures necessary to conduct proper due diligence when incorporating private market investments into 401(k) plans. This will provide the regulatory certainty employers need to expand investment options for their employees and curb frivolous lawsuits.
A nonpartisan research organization drafted a sample rulemaking that provides safeguards that ensure these investments are transparent and provide accurate valuations. The Committee on Capital Markets Regulation states that their draft “would require a 401(k) fiduciary to independently determine that adequate measures have been implemented to ensure that private equity assets will be fair valued according to standard accounting principles or by reference to third-party transactions.” A rulemaking will provide the safety and stability needed for employers to comfortably incorporate these investments into their retirement plans — if they so choose.
There are simple regulatory solutions that will make a seismic difference for West Virginians trying to save for retirement. Employers across the state should be able to offer any type of retirement plan they would like to their employees. Now is the perfect time for the DOL to act and unleash investment access across the Mountain State.
Jarred Cannon is a member of the West Virginia House of Delegates and chairman of the House Subcommittee on Investments.
