Your 401(k) Mutual Fund Might Include Uber and Pinterest Stocks
Earlier this week, Ester asked us to consider whether the 401(k) experiment has been a failure. The problem is, of course, that 401(k)s fail at the individual level. At the financial services level, 401(k)s are a huge success—to the point where brokerages like Fidelity are bringing the next generation of tech companies into your 401(k) mutual fund investment.
Fidelity’s Contrafund includes $204 million in Pinterest shares, $162 million in Uber shares, and $24 million in Airbnb shares. Over all, there were 29 deals last year in which a mutual fund bought into a private company, and they were worth a collective $4.7 billion, according to CB Insights. That was up from six such deals, worth a combined $296 million, in 2012. T. Rowe Price was the most active big investor, making 17 investments in private tech companies.
Because these tech companies are not required to issue financial reports and are not traded on traditional exchanges, they are the sort of speculative investments not normally found in retirement accounts.
All right, so why are they in your retirement account if they’re so speculative? The NYT notes that tech companies like Uber are “growing faster” than traditional companies you might find represented in a mutual fund, and GeekWire presents it as a win-win scenario:
For startups, the trend represents a welcomed source of new capital as they look to raise large sums without having to go public.
So Fidelity and T. Rowe Price get to invest in rapidly-growing companies, Uber and Pinterest get more capital, and what do you get? Maybe not as much as you think. From the NYT:
Fidelity’s Uber stock, for example, represents less than 1 percent of each fund’s total holdings. For investors, of course, that is a mixed blessing: Their retirement stays safe, but when a company like Uber appreciates 1,000 percent, they get only a sliver of the profits.
But you do get a bit of the risk! From GeekWire:
If there were to be a tech bust, like the one in the early 2000s, it would not just be wealthy individuals, who have poured money into risky ventures funds or IPOs, that would be at risk. It would also be the average American’s stock portfolio.
Now, I’m not a mutual fund expert, but something in this doesn’t balance out. If you only get a “sliver” of profits on Uber’s growth, shouldn’t you only absorb a sliver of risk if Uber goes bust for, I don’t know, harassing women or treating its drivers poorly or deliberately skirting city regulations on taxi services? Can someone who knows a bit more about mutual funds help explain this?
Lastly, if you’re thinking “wait, I don’t want my mutual fund to invest in these new, untested companies,” remember that Uber just turned 6 years old, Pinterest is 5 years old, and Airbnb is a full 7 years old. Whether you consider these companies “untested” or not, they are definitely no longer new. They’ve grown up and are now ready to help you as you plan your retirement—by making a “My Retirement” Pinterest board, naturally. You can put a screenshot of your most recent 401(k) statement next to a photo of artistically upcycled Mason jars.
Photo credit: Wesley Eller