Private Credit Is in Turmoil–and Could Be in Your Future 401(k)

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Chair Jerome Powell says the Fed can look past the oil shock, but maybe not forever. Plus, private credit is in turmoil, and the Trump administration is trying to make it easier to add it to 401Ks. And Sam Altman hyped Sora as OpenAI's next big thing.

Berber Jin (0:49)

He really felt like this could have been a chatty PT moment for the creative space.

Alex Ossola (0:54)

So why did it all fall apart? It's Monday, March 30th. I'm Alex Ossola for the Wall Street Journal. This is the PM Edition of What's News, the top headlines and business stories that move the world today.

Don't expect the current market chaos to prompt a knee-jerk reaction from the Fed. Today, Federal Reserve Chair Jerome Powell said the Central Bank will likely stay the course and keep rates steady, despite the energy shock caused by the war in Iran. Speaking to students at Harvard University, Powell said monetary policy typically works too slowly to counteract sudden economic shocks in real time.

Jerome Powell (1:31)

Monetary policy works with long and variable lags, famously. And so by the time the effects of tightening in monetary policy take effect, the oil price shock is probably long gone.

Alex Ossola (1:45)

But he cautioned that if Americans expect significant inflation over the long term, the Central Bank may be forced to act.

You've heard us talk about how private credit is under pressure. Firms invested in software companies. And now investors are worried about how those companies will do in an AI era. Industry executives have dismissed market turbulence as an overreaction to a few bad investments. However, a new analysis by the Journal finds that four of the largest private credit funds have more exposure to the software industry than their filings suggest. For instance, Blue Owl's Credit Fund categorized 47 software-focused companies in unrelated buckets like education or transportation. Private credit funds say software companies that serve other sectors like health care should be reported in those buckets. That's been the approach since before the recent investor anxiety around software. Our What's News in Markets host Imani Moise spoke with Wall Street Journal retirement reporter Ann Tergesen about a new regulation out today from the Trump administration related to broadening the world of private credit. Imani, take it away.

Imani Moise (2:48)

Yes, so the Labor Department proposed a rule that could make it easier for retirement accounts like 401Ks to invest in private market funds. The proposal is a win for Wall Street firms. They want access to the huge 401K market, but comes as private credit firms report rising defaults and are limiting investors' ability to withdraw their funds. Ann joins me now to explain what this means for investors. So Ann, what's new in this proposal?

Anne Tergesen (3:10)

So it's a little nuanced. 401K plans have always had the ability to invest in alternative investments. But because of the fear of litigation, a lot of employers who run 401K plans have really shied away from alternative investments. So President Trump this summer issued an executive order instructing regulators to make it easier for employers to add alternative investments to 401K plans. What's new here is that the Labor Department provides sort of a legal framework that spells out for employers how they can add private investments and other alternatives to their plans. Steps that they need to take to adequately vet these investments to qualify for what they're saying should be a safe harbor or sort of protection from litigation.

Imani Moise (4:03)

So why do private fund managers say these investments should be a part of retirement accounts?

Anne Tergesen (4:08)

So, you know, they say that these private investments have long been available to elite investors like pensions and endowments and the wealthy. And they also make an argument that there are just fewer publicly traded companies to invest in now. More companies are remaining private for longer. So they're just saying that 401k investors also deserve the option to have access to a growing slice of the economy.

Imani Moise (4:35)

And who are the biggest critics of this proposal? And what's their argument against it?

Anne Tergesen (4:39)

So plaintiff's attorneys are big critics of this. They don't like the thought of having litigation restricted. But there's also consumer rights groups. And they argue that these are illiquid, often opaque investments and that they have higher fees. So that the argument that private investments are going to actually help 401k investors just doesn't hold up. And the Treasury Department has expressed some concern about certain aspects of private credit. Treasury Secretary Scott Vesant was concerned that the regulations might make it easy for fund managers to just stick 401k investors with underperforming private credit investments. And so he wanted some kind of guardrails in there. 401k plans have a fiduciary obligation to vet investments. And they take that fiduciary obligation very seriously. And nothing moves quickly in the 401k world. So 401k plans are going to have to really kick the tires on these things.