The best retirement investment you can’t have
There's an easy way to nearly double the equity return that your 401(k) is generating—you just can't have it.
The investment asset class delivering the highest rate of return for future retirees is private equity. At a time when American workers are fretting over not having enough saved up in their retirement nest eggs—and facing the prospect of working longer—the pressure is on to maximize long-term savings options.
Large public pensions with billions of dollars to invest are seeing a big payoff from private equity. It's outperforming every other asset class, according to a new study by the Private Equity Growth Capital Council (PEGCC).
But unless you are a pension fund chief investment officer—or are a public sector worker that the pension CIO is investing on behalf of—your retirement plan isn't likely to access private equity.
"Time and again private equity has proven that it's the single-best asset class for public pensions, by delivering superior returns over longtime horizons," said Steve Judge, president and CEO of the PEGCC.
The study looked at 146 public pension funds in the U.S. with assets of more than $1 billion and found that private equity delivered an annualized return of 10 percent over the past decade. Compare that with the 5.8 percent return that private workers see in their stock-heavy portfolios.
It's no surprise that state pension funds are upping stakes in the PE game. Public pensions bumped up their investments in private equity from 9.6 percent to 10.3 percent in 2012—making it the third-most invested asset class behind public equity and fixed income.
CalPERS—the biggest public pension system in the country—has the largest PE exposure, at $34.2 billion.
Top 10 pension funds by private equity returns
|Rank||Public Pension|| Annualized Private
| Annualized Private
|1||Massachusetts Pension Reserve Investment Trust (Prit) Fund||9.1%||15.4%|
|2||Los Angeles County Employees Retirement Association||10.2%||N/A|
|3||Teacher Retirement System of Texas||6.3%||15.5%|
|4||Houston Firefighters' Relief and Retirement Fund||9.3%||13.6%|
|5||Minnesota State Board of Investment (Combined Funds)||7.7%||14.4%|
|6||Iowa Public Employees' Retirement Fund||7.9%||14.1%|
|7||San Francisco Employees' Retirement System||7.4%||13.1%|
|8||Utah Retirement System||6.2%||13.5%|
|9||Pennsylvania Public School Employees' Retirement System||6.6%||13.0%|
|10||Contra Costa County Employees' Retirement Association||7.1%||12.7%|
The biggest private equity winner has been the Massachusetts Pension Reserves Investment Trust—with a 15.4 percent 10-year return.
"Time and again private equity has proven that it's the single-best asset class for public pensions."
Public pension turmoil has been looming over cities and states for years. The pressure is mounting for states to close gaps and keep enough cash on hand to make sure obligations do not fall into the red—rendering them unable to make good on the benefits they owe to the some 17 million-plus state public employees across America.
(Read more: Jack Bogle on teaching your kids to invest)
New Jersey and Illinois are among the worst in the nation when it comes to dollars owed to future public workers. The Garden State's shortfall widened in fiscal year 2012, ballooning to $47.2 billion. Illinois might be in the worst shape—it has a shortfall of nearly $100 billion. In fact, collectively states have an outstanding bill of $1.38 trillion in unfunded pension obligations, according to the latest numbers from the Pew Center on the States.
"Private equity continues to strengthen the retirement security of the millions of American police officers, firefighters, teachers and administrators who rely on hard-earned pension benefits," Judge said. "There is no doubt that private equity returns are essential to improving the pension funding equation."