Under the Cover of Covid, Trump DOL Threw 401k Investors to the Wolves
While the pandemic was raging, Trump U. S. Department of Labor watchdogs opened the door for private equity wolves to sell the highest cost, highest risk, most secretive investments ever devised by Wall Street to 401k plan sponsors. 401k investors will be devoured like lambs to the slaughter.
In May 2020, the U.S. Department of Labor opened the door for plan sponsors to add private equity funds to their 401(k) plans. That was a huge win for the private equity industry since 401ks hold nearly $9 trillion in assets and a monstrous setback to American workers who invest in 401ks for retirement security.
After over three decades of egregious retail price gouging by mutual fund companies—as to which the DOL turned a blind eye—401k costs have in recent years been trending downward thanks primarily to widespread excessive-fee private class action litigation. If private equity is embraced, 401k costs will skyrocket, risk will dramatically increase and transparency will plummet.
Bad enough that DOL—the federal agency which is supposed to protect employer-sponsored retirement benefit plans—welcomed the wolves of Wall Street to feast on workers’ hard-earned savings, but the explanation the agency provided for its reckless action at the time was perverse.
Ramping up the fees and risks to 401k savers will “overcome the effects the coronavirus had had on our economy” and “level the playing field for ordinary investors” by allowing workers to gamble their limited retirement savings like millionaires who can afford to lose lots.
According to the DOL press release, then-Chairman of the U.S. Securities and Exchange Commission Jay Clayton commended the Department’s efforts “to improve investor choice and investor protection,” saying the new guidance, “will provide our long-term Main Street investors with a choice of professionally managed funds that more closely match the diversified public and private market asset allocation strategies pursued by many well-managed pension funds as well as the benefit of selection and monitoring by ERISA fiduciaries.”
The then-Chairman of the world’s premier securities regulator evidently was unaware a decade-plus of private equity investing by so-called “well-managed” pensions has resulted in increasingly disappointing, not to mention inflated and unauditable performance results. (In February 2021, Apollo Global Management, Inc. announced that Jay Clayton had been appointed to serve as Lead Independent Director of its Board of Directors, effective March 1, 2021. He assumed this newly created role following his service as Chair of the SEC from May 2017 through December 2020.)
Warren Buffett, arguably the world’s most respected investor, recently escalated his criticism of private equity firms.
At Berkshire Hathaway 2019 annual meeting Buffett stated, “We have seen a number of proposals from private equity firms where the returns are not calculated in a manner that I would regard as honest… If I were running a pension fund, I would be very careful about what was being offered to me.”
Chairman Clayton and DOL may have thought they knew more about the risks and rewards of private equity investing than Buffett.
They didn’t.
They may have believed gambling on private equity was a prudent strategy for recovering pandemic losses.
It isn’t.
In my experience investigating over $1 trillion pensions, struggling plans almost always migrate to riskier, costlier investments in their final hours to save themselves—a Hail Mary that, predictably, only hastens their demise. Gambling is no way to improve retirement security.
Private equity improves investor protection? Given that private equity funds lack all of the hallmarks of prudent investments this statement is especially disingenuous.
As I discuss in Who Stole My Pension? private equity funds are the highest cost, highest risk, least transparent and most illiquid. Their assets are the hardest-to-value and the easiest-to-inflate.
I’ve investigated thousands of these funds and found rampant violations of law.
SEC staff examinations of private equity firms have reportedly found that more than half allocated expenses and collected fees inappropriately and, in some cases, illegally. Why would a retirement plan regulator open the door to an industry which more-often-than-not cheats? Are 401k investors clamoring for private equity and willing to take their chances?
According to EBSA Acting Assistant Secretary Jeanne Klinefelter Wilson (who rejoined the Groom Law Group in 2021), the new guidance “should assure defined contribution plan fiduciaries that private equity may be part of a prudent investment mix and a way to enhance retirement savings and investment security for American workers.”
In my 35 years of experience, I have never met a defined contribution plan fiduciary who is capable of fully understanding the heightened risks related to private equity investing. For plan fiduciaries who choose to dance with these wolves, prepare to be bitten.