Adam Bergman

Founder, Tax Lawyer, Author

But there is a problem with that assumption: the law never said Americans had to invest their retirement money that way.

When Congress passed ERISA in 1974 and created the Individual Retirement Account, it did not restrict IRA investors to publicly traded securities. Subject to certain specific restrictions and the prohibited transaction rules, retirement accounts have historically been able to invest in a remarkably broad universe of assets, including real estate, private businesses, private investment funds, private loans, certain precious metals, and many other alternative investments.

Yet somehow, over the last 50 years, the IRA became almost synonymous with a brokerage account, and the 401(k) became synonymous with a menu of mutual funds. How did that happen? I think at least part of the answer can be understood through a concept economists and political scientists call regulatory capture, and understanding it may help explain not only how America’s retirement system developed, but also why wealthy investors and institutions have historically enjoyed access to a much broader investment universe than the average American retirement investor.

What Is Regulatory Capture?

Regulatory capture is the idea that government regulation, even when originally created for legitimate public purposes, can gradually become influenced by the industries and institutions being regulated. The basic concept isn’t complicated. Imagine the government decides an industry needs regulation because consumers need protection. The government begins writing rules, establishing compliance standards, creating licensing requirements, and determining how businesses in that industry can operate.

Who understands that industry better than almost anyone? The companies already operating inside it. Those companies naturally become deeply involved in the regulatory process. They hire lawyers, lobbyists, economists, compliance professionals, and government relations specialists. They submit comments on proposed regulations, meet with regulators, and participate in industry associations. Former government officials sometimes go to work in the industries they previously regulated, while people with industry experience sometimes move into government.

None of this necessarily involves corruption or illegal conduct. In many cases, regulators genuinely need industry expertise because modern financial markets, technology, banking, healthcare, energy, and other industries are extraordinarily complicated. The problem is that the interests of the largest companies and the interests of consumers aren’t always identical. A giant corporation may actually prefer certain regulations because it already has the lawyers, technology, capital, and compliance infrastructure necessary to satisfy them. A startup or smaller competitor may not.

That means regulation can sometimes accomplish two things simultaneously. It can protect consumers from legitimate risks while also creating a competitive moat around the largest existing businesses, which is where regulatory capture becomes so important. The regulation doesn’t necessarily have to say small companies can’t compete. It simply has to make competing expensive enough, complicated enough, or risky enough that fewer companies are willing or able to do it.

Are We Watching the Same Debate Develop Around Artificial Intelligence?

Artificial intelligence provides a fascinating modern example of why this issue matters. OpenAI, Anthropic, Google, Meta, Microsoft, and other major technology companies are spending enormous amounts of money developing increasingly powerful AI systems, and at the same time, governments around the world are trying to determine how these systems should be regulated.

There are legitimate reasons for regulation. Powerful AI systems raise serious questions involving cybersecurity, privacy, biological risks, intellectual property, misinformation, national security, and potentially autonomous decision-making, and I’m not suggesting those concerns should be ignored. But regulatory capture teaches us to ask another question: who benefits from the regulatory structure that ultimately gets created?

Suppose operating a sufficiently powerful AI model eventually requires extensive government testing, expensive cybersecurity controls, licensing, mandatory reporting, enormous insurance coverage, sophisticated compliance departments, or government approval before a model can be released. OpenAI or Anthropic may be able to spend hundreds of millions of dollars satisfying those requirements. A small developer working on an open model cannot. The regulation may therefore accomplish something very interesting: it may legitimately make AI safer while simultaneously making it considerably harder for smaller competitors and open-source developers to challenge the largest AI companies.

That doesn’t automatically make the regulation bad, nor does it prove that any particular AI company is trying to eliminate open models. The major AI companies themselves have taken different positions on open-weight models and regulation. But it illustrates the fundamental regulatory-capture question. When the biggest companies in an industry help government determine the rules governing that industry, are those rules protecting the public, protecting the incumbents, or doing some combination of both? We should ask that question about AI today, and I think we should also ask it about what happened to America’s retirement system over the last 50 years.

ERISA Did Not Wall Off Alternative Assets

The Employee Retirement Income Security Act of 1974 was one of the most important retirement laws in American history. Among many other reforms, ERISA created the IRA. Congress later added Section 401(k) to the Internal Revenue Code in 1978, and the 401(k) subsequently evolved into the dominant employer-sponsored retirement vehicle for millions of American workers.

The important point, however, is what Congress didn’t do. Congress did not say that an IRA could invest only in publicly traded securities. The Internal Revenue Code instead generally approaches IRA investing by identifying certain things an IRA cannot do. There are restrictions involving life insurance and certain collectibles, for example, and Internal Revenue Code Section 4975 contains extremely important prohibited transaction rules governing transactions between retirement accounts and certain disqualified persons. But the tax code does not contain a simple approved list saying that an IRA may own Apple stock, an S&P 500 mutual fund, and Treasury bonds but cannot own an apartment building, private company, or private investment fund.

That is why Self-Directed IRAs exist. The underlying IRA is not fundamentally different, what is different is the financial institution administering it and the assets that institution is willing to custody. That distinction has been lost on generations of retirement investors.

Wall Street Built the Wall

As America’s retirement system expanded, large banks, brokerage firms, mutual fund companies, insurance companies, recordkeepers, and financial advisers became the primary infrastructure through which Americans accumulated retirement wealth. Those institutions understandably built systems around investments that were scalable, standardized, liquid, easily priced, easily traded, and easy to administer, and public securities fit that model perfectly. A share of Microsoft can be priced every second of the trading day. A mutual fund has standardized reporting. An ETF can be purchased electronically. A bond can be held through conventional custody systems.

Now compare that with a duplex in Miami. Someone needs to verify ownership. Someone needs to process the purchase. Expenses must be paid correctly. Rental income must flow back to the retirement account. The property may need an independent valuation. There may be prohibited transaction concerns, and if debt is involved, additional tax considerations may arise.

Or consider a $100,000 investment into a private startup. The custodian may need subscription documents, capitalization information, valuation information, and specialized reporting. There is no daily market price and no button that allows the asset to be liquidated at 10:32 tomorrow morning. From the perspective of a giant brokerage firm trying to administer millions of retirement accounts, it’s easy to understand why publicly traded securities became preferable. But what makes perfect business sense for a financial institution doesn’t necessarily produce the broadest investment choices for the retirement investor.

Over time, the institutional limitation started to look like a legal one. Americans began believing an IRA was a brokerage account because practically every IRA they encountered was offered by a brokerage firm. But an IRA is not a brokerage account, it’s a tax-advantaged retirement structure, and a brokerage account is simply one possible platform for holding the IRA’s investments. That difference is enormous.

Wall Street Didn’t Need to Ban Alternative Assets

This is where the regulatory-capture concept becomes more subtle and, in my opinion, more interesting. Wall Street didn’t need Congress to pass a law saying Americans couldn’t own real estate or private investments in their IRAs, the tax code already allowed a broad investment universe. Instead, the retirement ecosystem gradually evolved around the needs of the largest financial institutions. Custody rules, fiduciary concerns, valuation requirements, securities regulation, recordkeeping requirements, compliance costs, employer liability concerns, and increasingly standardized technology all reinforced a retirement system built around publicly traded financial products.

Every individual rule could have a perfectly legitimate justification, and that’s an important point. Regulatory capture doesn’t necessarily mean every regulation is bad or that regulators are secretly working for financial institutions. It means the cumulative effect of regulation can favor the institutions best positioned to operate within that regulatory environment. The larger and more complicated the system becomes, the more valuable scale becomes, and Wall Street has scale.

The Accredited Investor Rule Created Another Wall

The accredited investor rules provide another powerful example of how investor protection can also restrict investor opportunity. The accredited investor concept dates to 1979 and 1980, but the modern rule most people think of was established in 1982.

For decades, one of the principal ways for an individual to qualify as an accredited investor has been financial: generally more than $200,000 of annual individual income, $300,000 of joint income, or more than $1 million of net worth excluding a primary residence. The rules have subsequently expanded to recognize certain professional credentials and other categories.

The rationale behind the rule is understandable. Private securities generally don’t provide investors with the same disclosure regime that applies to publicly registered securities, so the government wants to protect people who may not have sufficient sophistication or financial capacity to understand or withstand the risks.

But think about the practical consequence. Wealth itself became one of the principal tickets into private markets. If you were wealthy enough, you could potentially invest in startups, venture capital, private equity, private credit, private real estate offerings, and other private securities. If you weren’t wealthy enough, many of those opportunities were legally unavailable to you, which creates a cycle that favors the wealthy: people who already have substantial wealth get access to a larger universe of investments capable of producing additional wealth, while everyone else is generally directed toward public markets.

The timing also matters, because so much wealth gets created before a company goes public. Founders, employees, venture capital firms, private equity firms, and accredited investors can participate in years of growth before the average investor gets access. There is nothing wrong with public stocks, they’ve created enormous wealth for Americans. But wealthy and institutional investors often get to invest earlier. In simple terms, the wealthy often get a head start.

The 401(k) Reinforced the System

The evolution of the 401(k) pushed the retirement system even further in this direction. Employers understandably wanted simple plans, employees needed understandable choices, recordkeepers needed scalable technology, and plan fiduciaries wanted to reduce risk and fulfill their obligations under ERISA. The easiest solution became a standardized investment menu consisting primarily of mutual funds and, eventually, target-date funds. Again, there are perfectly reasonable reasons for this, but this is the result: a worker may accumulate $500,000, $1 million, or even several million dollars inside a 401(k), yet still be limited to 20 or 30 investment options selected by the plan. The worker owns the retirement wealth economically, but somebody else largely determines the investment universe. That’s become so normal that almost nobody questions it.

Compare That with How the Wealthy Invest

The difference becomes clear when you look at how wealthy families and large institutions invest. They don’t just own stocks and bonds, they also invest in real estate, private equity, private credit, venture capital, private businesses, and other assets.

The average retirement investor has historically had far fewer choices. You may own 15 different mutual funds, but if they mostly hold the same types of public stocks and bonds, are you really that diversified?

What Did Retirement Investors Potentially Lose?

I’m not anti-stock market. For someone who is just beginning to save for retirement, I think low-cost index funds can be one of the best places to start, because they’re inexpensive, liquid, diversified, and simple. My objection isn’t to public markets, it’s to the idea that retirement investing should only mean public markets.

By creating a system overwhelmingly centered around publicly traded securities, retirement investors potentially lost access to several important benefits. One is greater diversification: real estate, private credit, private businesses, precious metals, and other alternative investments can have very different economic characteristics from publicly traded equities and bonds. Another is the potential illiquidity premium, since investors are sometimes compensated for committing capital to assets that can’t be sold instantly, although that potential premium certainly comes with additional risk.

Most importantly, investors potentially lost access to some of the wealth creation occurring in private markets. If more companies remain private longer, and more value is created before an IPO or acquisition, restricting ordinary investors primarily to public securities becomes increasingly consequential.

Regulation Often Protects Us, Until It Protects the System

This is why regulatory capture is such an important concept. Most financial regulations start with good intentions, such as protecting retirement savers, preventing fraud, improving disclosure, reducing conflicts of interest, and protecting less experienced investors, and those are all worthwhile goals. But we also need to look at the system those regulations have created over time. If wealthy Americans and large institutions have access to the widest range of investments while ordinary Americans are largely limited to financial products offered by big financial institutions, we should ask whether the system is still working as intended.

There is a big difference between protecting people from fraud and protecting them from opportunity, and sometimes regulation can unintentionally cross that line.

The Self-Directed IRA Exposes the Entire Paradox

I’ve spent much of my career working with Self-Directed retirement accounts, and one of the things that continues to amaze me is how many sophisticated investors don’t know these accounts exist. The Self-Directed IRA exposes the central contradiction in America’s retirement system.

Take two people who each have $500,000 in an IRA. The first person’s IRA is held at a traditional brokerage firm, and that person may believe the IRA can invest only in stocks, bonds, ETFs, and mutual funds because those are the only investments displayed on the platform. The second person’s IRA is held with a Self-Directed IRA custodian and potentially invests in public securities, real estate, a private fund, private stock, precious metals, or other permitted assets.

Both investors are operating under the same Internal Revenue Code and receiving the same basic IRA tax benefits, yet they have access to completely different investment options. The difference isn’t the law, it’s the financial institution serving as the gatekeeper.

Congress Gave Us an IRA. Wall Street Turned It Into a Brokerage Account.

I think that heading summarizes 50 years of retirement investing remarkably well. Congress created a tax-advantaged vehicle that offered Americans considerable investment flexibility. The financial industry built an incredibly successful infrastructure around it, but that infrastructure overwhelmingly favored the financial products that large institutions could efficiently custody, administer, distribute, and monetize. Then securities regulation created additional barriers around private markets.

The result wasn’t necessarily planned by some group sitting around a conference table, that’s generally not how regulatory capture works. Instead, it tends to happen gradually: a reasonable regulation gets introduced, followed by new compliance requirements, financial institutions adapt, industry standards develop, and technology and business models get built around those standards. Eventually, consumers become so accustomed to the system that everyone assumes this is simply the way it has to work, which is exactly why regulatory capture can be so difficult to recognize.

The Next Retirement Revolution Should Be About Access

I believe the next major evolution in retirement investing should be about giving Americans greater access and control. That doesn’t mean eliminating investor protections, and it doesn’t mean putting someone’s entire retirement account into a startup, cryptocurrency, or apartment building. It certainly doesn’t mean alternative assets are appropriate for every investor. What it does mean is recognizing that a retirement account should be a vehicle for building wealth, not simply a distribution channel for traditional financial products. There’s no reason technology can’t increasingly allow an investor to hold stocks, ETFs, private businesses, real estate, private investment funds, precious metals, and digital assets within the same retirement ecosystem, subject to the appropriate tax, securities, and prohibited transaction rules.

Wealthy investors have understood the value of owning different types of assets for generations, and ordinary retirement investors deserve the same opportunity. Yet after more than 50 years of IRAs, one of the biggest misconceptions remains: the government never said your IRA had to be a brokerage account.

Regulatory capture helped change the way Americans think about retirement investing. Over time, rules, financial institutions, and industry practices created a system that pushed most retirement savers toward stocks, bonds, and mutual funds, even though the tax code generally allowed much more. The result is that an entire generation came to believe retirement investing meant investing through Wall Street. It doesn’t have to. Americans should have the opportunity to diversify, invest in alternative assets, and take greater control of their retirement money.

Maybe the next retirement revolution isn’t about creating another retirement account. Maybe it’s about finally giving Americans greater access to the one they already have.

This content is for educational purposes only and does not constitute legal, tax, or investment advice. Consult a qualified professional before making any investment decisions.