Trump SEC Chairman Urges 401ks To Gamble Away Coronavirus Losses

Trump SEC Chairman Jay Clayton urges 401k plan sponsors and investors to gamble on private equity funds as a means of recovering coronavirus losses. Since when is it the job of the Chairman of the world’s premier securities regulator to encourage reckless risk-taking by American workers already reeling from pandemic losses?

Last week, the U.S. Department of Labor opened the door for plan sponsors to add private equity funds to their 401(k) plans. The Trump administration claims removing the barriers to private equity gambling in 401ks will allow American workers to overcome the effects the coronavirus has had on our economy. That is, gambling gains will make up for pandemic losses.

Coronvirus Catch-Up? Really?

That sounds like “advice” you’d expect from a casino owner, not from a federal agency that’s supposed to protect employer-sponsored retirement benefit plans.

The Chairman of the U.S. Securities and Exchange Commission Jay Clayton stated the new DOL position on private equity “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.”

For openers, as I document in my book Who Stole My Pension? our nation’s pensions can hardly be called “well-managed.” Rather the phrase “gross malpractice generally practiced” best describes pension investment decision-making in America.

Gross mismanagement is precisely why thousands of pensions have failed and have had to be bailed out by the federal government, i.e. taxpayers.

We don’t want America’s workers migrating to riskier, costlier investments to save their retirement dreams—the same desperate Hail Mary that hastened the demise of pensions.

Gambling is no way to improve retirement security. 

Furthermore, since when is it the job of the Chairman of the world’s premier securities regulator to encourage reckless risk-taking by workers already reeling from pandemic losses?

Thirty seven years ago, fresh out of law school, I proudly joined the Division of Investment Management of the U.S. Securities and Exchange Commission in Washington D.C., the Division which regulates money managers and investment funds. The primary mission of the agency, I was told my first day at orientation, was “the protection of investors.”

In the 1980s—before mutual fund assets under management skyrocketed due to the introduction of IRAs and 401ks—SEC regulators were concerned investment advisory fees were too high and that the advisory industry was not providing investors with full and timely information regarding their funds. The industry assured the SEC that over time, as assets under management increased, economies of scale would bring fees down and in the Information Age financial data would flow more freely to investors. We regulators and the regulated firms agreed: the future would inevitably bring lower fees and greater transparency for investors.

We could not have been more wrong.

Thanks to private equity and other alternative investment funds, fees have actually grown exponentially from, say, less than one percent to over six percent annually and transparency has plummeted. Over the past 15 years, Wall Street has even eviscerated the nation’s public records laws, claiming that self-dealing practices at private equity and other alternative investment firms that harm investors are “proprietary business information” exempt from disclosure.

That’s right—potentially illegal acts, i.e. tricks of the trade, are “trade secrets” entitled to protection from public scrutiny.

Private equity and other alternatives are the highest-cost, highest risk, most secretive investments ever devised by Wall Street. That’s all you, as a 401k investor, need to know.

While Chairman Clayton is an unabashed private equity cheerleader, SEC staffers have long had grave concerns about industry ethics and practices.

Here’s some of what Marc Wyatt, Acting Director, Office of Compliance Inspections and Examinations had to say at a private equity industry conference a few years ago about firms favoring friends and family funds:

“By far the most common deficiencies noted by our examiners in private equity relate to expenses and expense allocation. Many managers still seem to take the position that if investors have not yet discovered and objected to their expense allocation methodology, then it must be legitimate and consistent with their fiduciary duty.

One of the most common and often cited practices in this area involves shifting expenses away from parallel funds created for insiders, friends, family, and preferred investors to the main co-mingled, flagship vehicles. Frequently, operational expenses, broken deal expenses, and even the formation expenses of the side-by-side vehicle are borne by investors in the main fund. Some of these expense items are small, but some, such as the broken deal expenses of an active fund, can be quite large. This practice can be a difficult for investors to detect but easy for our examiners to test.”

Who do you think will get struck paying the highest fees? Private equity insiders, friends and family? Or 401k investors like you who would have difficulty, says Wyatt, even detecting the unfair expense shifting?

Then there’s the thorny issue of conflicts of interest in allocating investment opportunities, i.e., which investors get allocated the best deals. Here’s what the SEC staffer had to say:

“…we have detected several instances where investors in a fund were not aware that another investor negotiated priority co-investment rights. Disclosing this information is important because co-investment opportunities have a very real and tangible economic value but also can be a source of various conflicts of interest. Therefore, allocating co-investment opportunities in a manner that is contrary to what you have promised your investors can be a material conflict and can result in violations of federal securities laws and regulations.”

Again, who do you think is going to preferential treatment?  Friends of billionaires or America’s workers?

For 401k investors the message is clear: Trump’s SEC does not have your best interests in mind and cannot be relied upon for investor protection. As a former SEC attorney, I assure you this is not business-as-usual at the agency.

Allowing 401ks to gamble on private equity has nothing to do with helping workers recover from the pandemic and everything to do with fattening private equity billionaire bottomlines.