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Editorial

Defined contribution participants need equal access to the markets

ADT Inc.’s logo is displayed during the company’s IPO at the New York Stock Exchange last month. Despite the rebound in the economy, since 2009, the average number of IPOs has continued to decline.

The decline in the number of publicly listed stocks has contributed to the increase in stock prices since the beginning of the recovery from the 2007-2009 bear market — supply goes down, price generally goes up — but it is a mixed blessing.

It will have unintended negative effects on 401(k) plan participants that ought at least be considered.

The decline is a result of companies being acquired by others, being delisted, or failing and going out of business, and not being replaced by enough new companies going public. In 1996 there were 7,322 domestic companies listed on U.S. stock exchanges, but today there are just fewer than 3,700. Not enough new companies are listing on an exchange.

The initial public offering market has been volatile since the internet bubble, collapsing to 84 in 2003 from 404 deals in 2000. Since 2004 the number of IPOs has averaged 167 a year, with a high of 291 in 2014 and a low of 35 in 2008. Since 2009, despite the rebound in the economy, the average has declined even further to 161 a year — not enough to offset delistings.

Why should anyone care? The trend has favored institutional investors that have access to the private markets where more and more companies are raising the funds they need to grow, and as noted, contributed to price increases in listed stocks, at least at the margin.

They should care because lack of access to capital through the private equity and debt markets is depriving individual investors, especially those investing through defined contribution plans and individual retirement accounts, of access to the full spectrum of the markets.

Ever since pension funds, endowments and foundations became heavily involved in the private markets, access to capital for startup companies has become easier. Because of the easier access to that capital, companies are remaining private far longer than in the past. At the same time, there are real costs in going public, including disclosure burdens, that companies prefer not to incur if not necessary.

DC plan participants often are deprived of the opportunity to invest in companies like Facebook Inc. in the early highest growth years when rewards are greatest. They are limited to established, often slower-growing companies.

Creative ways must be found to channel DC assets into the private markets so all investors can share in the highest-growth companies.