America has a massive retirement savings problem.
People are living longer, and they don’t have the ability to build up the necessary amount of money to sustain themselves when they leave the workforce.
As reported by Business Insider’s Elena Holodny, the Insured Retirement Institute surveyed 800 Americans ages 54 to 70 and found that just 23% of the baby-boomer respondents thought that their savings would last through retirement or that they had done a good job preparing for retirement. Moreover, only 54% had any retirement savings, and only 40% had tried to calculate how much money they would need to retire.
But the head of one of the world’s largest investors thinks his firm has the solution to this problem.
During an earnings call on April 20, Tony James, the COO of Blackstone, the $US368 billion private equity and asset management firm, addressed the mounting retirement crisis.
“People are squeezed on … student loans, healthcare costs, childcare costs and other things,” James said. “They can’t save 10% or 20% of their income.”
And James said savings accounts that only yield 2% to 4% interest don’t cut it.
“The only answer to that, particularly with the markets, where they are, is to move out of purely liquid markets into alternatives,” James said.
Basically, James is saying the only way Americans can properly save for retirement is if they can invest their money in alternative investment firms like Blackstone, which put money into non-traditional assets such as hedge funds and private equity and claim to deliver better returns.
CEM Benchmarking looked at the fund performance of defined benefit pension funds from 1998 to 2014, and found that private equity ranked second to listed-equity real estate investment returns for average annual net returns.
“Private equity had the highest average gross return, estimated as 13.5%, but had the second highest average net return of 11.4% because the impact of expenses,” the report said.
In contrast, hedge funds ranked second last. The asset class that finished last, US other fixed income, included cash.
“If cash is excluded from U.S. other fixed income as an aggregate asset class, then hedge funds/TAA would have been the worst performing asset class with a 17-year arithmetic average annual net return of 5.5 per cent,” the report said.
James is not the only one on Wall Street who thinks regular savers should be able to invest in private equity and other alternatives. Across the alternative investment space, firms have been pushing for regulatory reforms to allow 401(k) and ordinary investors to invest in their funds. Rachel Butt at Business Insider noted in an article last year:
Private-equity investments are already available within certain defined-contribution plans, via something called a target-date fund. However, not all big 401(k) sponsors have private-equity investments as an option because of their illiquid nature and because they’re harder to value than stocks and bonds.
That could change under the Trump administration, which has made financial deregulation a cornerstone of its agenda. The president has already started to unwind many of the key financial regulations of the Obama administration. It’s worth noting here that Blackstone’s CEO Stephen Schwarzman serves as a key adviser to President Donald Trump.
In February, President Donald Trump signed an executive order that set in motion a potential repeal of a rule that would have made it harder for financial advisers to give conflicted advice.
The so-called fiduciary rule, which was slated to go into effect April 10, requires advisers to prioritise their clients’ interests ahead of theirs. The rule has drawn criticism from Wall Streeters who think the rule limits consumer choice.
The rule has been delayed for 60 days, and potentially could go into effect in June unless action is taken to delay it further or completely repeal the rule.