Retirement Savings in the Dark

Last summer, the Trump White House issued an executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors.” This order is not about democratization. It is an effort to redirect the $11 trillion dollars that ordinary Americans hold in 401(k)s into the least regulated, most opaque corner of American finance—at precisely the moment when the risks of investments that aren't traded on public stock exchanges are becoming harder to ignore.

In ordinary language, 401(k)s are employer-sponsored retirement savings plans that allow employees to automatically deduct a portion of their paycheck to invest for retirement. These 401k plans are a popular version of what are known as “defined contribution” plans. All defined contribution plans are risky because employees can’t predict what their actual retirement benefits will be. Nonetheless, defined contribution plans have largely replaced the defined-benefit pensions that once offered many employees a modicum of retirement security by guaranteeing a specific payout.

The White House order frames the exclusion of working people’s retirement savings from private financial markets as an unjust barrier—a wealth-building opportunity available to the wealthy and to public pension funds but denied to ordinary 401(k) holders. Following this framing, the Department of Labor soon rescinded a Biden-era statement that had discouraged retirement plan investment advisors from directing workers’ savings into private funds. 

The Architecture of Private Markets

Many employees have choices for their investments. Private financial markets are not easy for people with full-time jobs outside the industry to keep track of. Three of the most common investment vehicles in the private market are private equity funds, venture capital funds, and hedge funds. Private equity funds, which raise money to buy companies outright (often using borrowed money), try to cut costs and restructure the company so that, after a few years, they can sell the company (or pieces of it) for a profit. Venture capital invests in early-stage companies (often tech start-ups) hoping for spectacular returns when the company goes public by selling shares. Hedge funds pool money to bet on whether the price of traded assets such as stocks and bonds with go up or down, intending to make money either way.  (For more, see Arthur MacEwan, Left Hook Economics, “The Private Equity Deception.”)

Potential returns are indeed high, but so are potential losses. Because these private financial markets are not required to disclose nearly as much information as public markets, it’s easier for fund owners to hide any mistakes that might hurt their future returns. Disclosure rules are weaker largely because wealthy investors have lobbied for less oversight. They are less vulnerable than others to big losses, and hungry for the largest possible rates of return.

The rules that initially created the separation between the “public” financial markets and private finance were passed at the height of the Great Depression, an era of heightened risk awareness. The landmark Securities Acts of 1933 and 1934, along with the Investment Acts of 1940, established the Securities and Exchange Commission. Publicly traded companies and investment funds open to ordinary shareholders are now required to disclose their financial accounts on a regular basis. The rationale is that reliable information is a precondition for sound investment—and that without it, ordinary shareholders can get into serious trouble. 

Private markets were the explicit carve-out from these protections. Wealthy investors claimed that they were capable of fending for themselves without mandatory disclosure and should be considered “accredited investors.” They won the argument. As a result, private markets have always carried a different risk profile: investments can’t always be easily converted into cash, valuations are opaque, and the underlying companies’ finances are shielded from public scrutiny.

For most of the 20^th century, there was a clear wall between working people’s pension funds and the riskier corners of financial markets. This wasn’t accidental—it was the law. The Employee Retirement Income Security Act (ERISA), passed in 1974, was essentially a consumer protection law for retirement savings. Its core premise is simple: this is money people are counting on when they’re old and no longer employed, so it needs to be kept safe.  

The wall started to crack in 1979 when the Department of Labor quietly but consequentially rewrote part of ERISA. It loosened the so-called "prudent man" standard—the legal test for whether a retirement fund manager was behaving responsibly—to allow pension funds to invest in illiquid assets, meaning things you can't easily sell quickly, like venture capital. This was the first time institutional investors like pension funds were allowed into private financial markets.

But a 401(k) is a completely different animal from a large pension fund. It's an individual retirement account that employees largely manage themselves. There's no experienced professional manager overseeing decisions made on the basis of limited information, and no formal obligations to act in investors’ best interests.

Opacity as a Structural Feature

Since the 2008 financial crisis, private financial markets have surged in importance in the U.S. economy. According to the Securities and Exchange Commission (SEC), private funds now hold $16.7 trillion in net assets, up 8.5% from 2024 to 2025—including $7.3 trillion in private equity and $5.7 trillion in hedge funds. Private credit—loans outside of public bond markets, made by non-bank lenders—has grown from an estimated $217 billion in 2010 to $1.2 trillion in 2023. A relatively small number of firms control a very large share of the private credit market.

The problem is not only the rapid growth of private financial markets: it is the lack of transparency that these markets enjoy. Borrowing companies in private credit markets are not required to disclose their financial records, and private credit firms conduct their own loan valuations in lieu of external oversight. Creditors who are reluctant to report default rates that might hurt their image can simply postpone the problem (and increase risk) by extending loan terms. Regulators at the International Monetary Fund (IMF), the Federal Reserve Bank, and the Bank for International Settlements have flagged these systemic risks. But as the United Kingdom’s Financial Conduct Authority has noted, there is no clean boundary between the regulated banking sector and the unregulated non-banking sector—and oversight can only reach one side of that line.

The risks are not hypothetical. In early 2026, $17.7 billion in software company loans in the United States have become “distressed” (at risk of not being paid) in just one month, largely due to fears that artificial intelligence will disrupt software-as-a-service businesses. This sell-off generated stress across private credit markets and led to sharp losses for funds heavily exposed to the sector. Private equity firms are worried that AI is disrupting the software industry they have heavily invested in, making traditional software less valuable by offering faster, cheaper, and easier solutions. BlackRock, the world’s biggest asset manager, just marked the value of a $25 million loan down to zero just three months after valuing the loan at 100 cents on the dollar (i.e., valuing it as worth the value it had originally extended the loan). Analysts at the global investment bank Barclays have described the total risk of a broader downturn in private credit as “nearly impossible” to calculate. 

Who Bears the Loss

This brings us back to the $11 trillion that American workers hold in defined-contribution accounts, which make up the majority of what U.S. workers have saved for retirement (only about half of private-sector U.S. workers have any retirement savings at all). From the perspective of unregulated financial firms, this $11 trillion represents a vast pool of household savings that has long been beyond their reach. The recent White House executive order and accompanying deregulatory moves are an effort to change that. BlackRock’s Chief Financial Officer makes the extravagant claim that FO has claimed that private market exposure could increase retirement balances by 15% over a lifetime. 

What goes unmentioned is the danger. Unlike defined-benefit pensions, 401(k) plans shift all investment risk onto the individual worker. Fund managers collect fees regardless of performance. If private credit funds sustain significant losses—and the Swiss bank UBS has projected that under aggressive AI disruption scenarios, default rates could rise substantially—retirement savers, not fund managers, will bear the cost. 

Toward a Different Framework

The center of gravity in the financial markets was shifting well before President Trump came into office, and the response to his administration’s proposal cannot stop at opposing deregulation. The deeper problem for retirement security is the long shift away from defined-benefit pensions—which guarantee workers a secure retirement income independent of market conditions—toward defined-contribution plans that transfer investment risk entirely onto individual workers. An adequate retirement policy framework should strengthen protections for retirement savers and expand Social Security to reduce dependence on volatile market returns. 

In terms of financial regulation, we should extend meaningful regulation to private equity and private credit—not merely through disclosure requirements, which public markets have demonstrated are insufficient to constrain predatory behavior, but through direct limits on the practices that make these markets extractive, such as debt-loading of acquired companies, fee structures that reward managers irrespective of outcomes, and loan terms engineered to obscure default risk.

The proper goal of financial regulation is to protect workers’ savings and direct investment toward productive ends, not to expand the customer base of unregulated finance. The Trump administration’s “democratization” will hurt us all.

Lenore Palladino is associate professor in the Department of Economics and the School of Public Policy at UMass Amherst. She is also a research associate at the UMass Amherst Political Economy Research Institute, as well as a fellow at the Roosevelt Institute.