Risks escalate for U.S. retirement plans due to unregulated private credit funds and new rules opening them up to retirement savings accounts
When the privately owned auto parts manufacturer First Brands Group earlier this month began to be unable to service its $6.1 billion debt load, the financial press began to pick up on the story—not because it was so unique or important to the U.S. economy, but rather because various financial institutions, including the Swiss banking giant UBS Group AG, were admitting that their exposure to the company was higher and more complicated than they had previously shared, through their private credit funds.
UBS’s private credit funds have $500 million in debt exposure to Cleveland-based First Brands, which boasts more than 20 subsidiaries across the United States. The chaotic bankruptcy of First Brands exposed the opaque complexity of many institutions lending to one business, with leading shortseller Jim Chanos comparing these deals to the “packaging up of subprime mortgages that preceded the 2008 financial crisis, due to the ‘layers of people in between the source of the money and the use of the money.’”
Indeed, this kind of business lending takes place across the unregulated side of the U.S. financial system, creating a different kind of economic risk than policymakers are used to dealing with in the regulated banking sector. As this kind of lending becomes more central to U.S. economic activities, the interconnected levels of debt and collateral involved in these private lending deals need to be much more clearly disclosed by lenders—not least because these investments may soon appear in the retirement savings accounts of average Americans.
Under U.S. financial market regulations, private funds pool together money from many individuals and groups of individuals, often organized by their employer to put aside money collectively, into a vehicle that can engage in deals. Funds have to be managed by fund managers, who are required to disclose specific information about their activities unless they meet certain criteria that gives them an exception. The Investment Company Act of 1940 laid out these rules and created two exceptions, Section 3(c)(1) and Section 3(c)(7), which are limited in terms of the number of participants or to certain “qualified purchasers,” respectively.
These private funds have used these two exceptions for a long time, but because of their high-risk, high-reward profile, nonwealthy households were restricted from access to them. Financial institutions that pool the assets of nonwealthy households have been able to access such funds for decades, but the Trump administration has now opened up access to individual households through their retirement accounts—without increasing the risk management or disclosure requirements on these funds to help households understand what they are investing in for retirement.
Private equity funds have been a major feature of the U.S. economy for some time, but private credit funds have grown in importance more recently. They are structured to lend directly to nonfinancial businesses, with giant asset managers such as Apollo Global Management Inc. and Blackstone Inc. structuring bespoke deals, using the assets they manage for institutional shareholders such as pension funds and university endowments. These firms are increasingly taking market share away from the regulated banking sector, yet their activities are deeply intertwined with banks, as banks lend to the funds themselves.
The risks to the broader U.S. economy—and particularly to everyday Americans with retirement accounts—are clear. At the same time that the market share of private credit funds grows, government regulations are suddenly exposing retirement savings to unregulated financial assets.
Unregulated financial institutions now dominate financial activity, yet these sectors are still posited as an alternative to “normal” finance, such as public stock exchanges and regulated banks. There was good reason to divide the financial sector between regulated banks and exchanges and so-called private markets to protect less financially savvy and less-wealthy investors from the risks taken in unregulated finance. This barrier has now collapsed, and unregulated finance is flooding in to touch all sectors of the U.S. economy. Overall, private funds have approximately tripled in size in the past decade to nearly $25 trillion in gross assets, according to the most recent data from the U.S. Securities and Exchange Commission, and private markets raise more in equity than public markets.
This shift in finance toward unregulated private lending began in the aftermath of the 2008 financial crisis and has escalated so quickly that the possible adverse economic impacts are unclear. Yet the rising reliance of the nonfinancial corporate sector on private markets creates potential systemic risks and challenges for U.S. economic prosperity.
In the eyes of average Americans, publicly traded stocks on stock exchanges such as NASDAQ and the New York Stock Exchange are the dominant financial markets where shareholders buy and sell the stocks of large companies that offer their shares to anyone with the funds to buy them. Yet in 2024, 87 percent of companies with revenue greater than $100 million were private, meaning their equity is not available on open stock markets. Their equity—and, increasingly, their loans—are issued, bought, and sold on nonpublic financial markets that are almost entirely unregulated. Now, all U.S. households holding any financial assets could be exposed to these deals without even realizing it.
Here are the details of the Trump administration’s recent opening of these nonpublic markets to Americans’ retirement saving accounts. In an August executive order, “Democratizing Access to Alternative Assets for 401(k) Investors,” President Trump framed access to “alternative” assets as a barrier that must be breached. He argued in the executive order that while these assets are available to the wealthy and public pension fund beneficiaries, “more than 90 million Americans participat[ing] in employer-sponsored defined-contribution plans do not have the opportunity to participate … in the potential growth and diversification opportunities associated with alternative assets investments.”
No mention was made of why this barrier has been in place since the start of defined-contribution plans in the late 1970s. The U.S. Department of Labor—the regulator of employer-based retirement plans—followed up in late September by rescinding a Biden-era statement that “discouraged fiduciaries from considering alternative assets in 401(k) plan investment menus.” Leading financial institutions quickly rushing in to take advantage of this opportunity.
Blackstone, the world’s leading private alternative asset manager, opened a 401(k) business unit on October 15. Not to be outdone, Martin Small, CFO of BlackRock Inc., the largest asset manager holding public financial assets, claimed that “including private market assets in retirement accounts could add 50 basis points of additional returns annually and generate 15 percent more retirement assets by the end of life.” BlackRock also recently launched a new private equity-focused 401(k) fund.
These types of claims in support of these new investment vehicles are intended to fuel the rush of retirement savings funds into the private equity and private credit funds sectors of financial markets. Major financial market regulators, including the Federal Reserve and the International Monetary Fund, are calling attention to the vulnerabilities created by nonbank financial institutions, including private credit funds, as the sector continues to grow rapidly.
So, too, is the sole remaining Democrat-appointed commissioner at the Securities and Exchange Commission, Caroline Crenshaw. She recently remarked that “as calls for retail investor access to private markets accelerate, I am concerned that we are headed for a high-speed collision—with Main Street retail investors left without airbags.” That’s why policymakers need to look past claims about potential gains and understand the real risks that these developments pose to U.S. financial markets and American working families trying to save for retirement.
