You know Your Survival Guy has been a long-time critic of adding private equity and credit investments to 401(k) plans, not because these investments are inherently bad, but because they lack certain aspects that are important for retail investors. First among those are liquidity and transparency. Knowing when, and if you’ll be able to access your funds, is important. Now, professors Jeffrey Hooke of Johns Hopkins and Michael Imerman of UC Irvine have sent a letter to the Department of Labor asking it not to allow alternative investments into 401(k) plans.
The letter opens with a broadside against past inclusion of alternative investments into public pensions, explaining:
To begin, public pension plan retirees and U.S. taxpayers may have left billions of dollars of wealth on the table over time as a result of allocations to alternative investments, reflecting the combined effects of fee drag and, in some cases, limited net outperformance relative to public market benchmarks. As a result, the phenomenon of alternative investments and private assets entering the institutional lexicon has led to one of the greatest wealth transfers in U.S. history, from taxpayers and retirees to a relatively small group of alternative investment fund managers. The fee structures in private equity and alternative investments have provided large amounts of wealth to fund managers, concentrating ownership and economic influence in the hands of a relatively small group of individuals, who now exert meaningful influence across large segments of the U.S. economy. This influence is now evident in the political sphere, as reflected in the proposed regulation, which underscores the growing role of the alternative investment industry and highlights potential gaps between the actions of fund managers and the ethical/fiduciary responsibilities to investors and society at large. These changes have occurred largely outside of public attention without debate or scrutiny.
The professors go on to explain how inclusion of alternative assets into pension plans like CalPERS has led 95% of the plans to underperform “a well-diversified public market domestic 60-40 index over long stretches of time.”
The professors then comprehensively explain the flaws in the six “Safe Harbor Factors” the new regulation intends to implement. The authors conclude their letter by writing:
This commentary is a prelude to what should be the DOL’s broader role: evaluating the fiduciary framework governing the alternative industry’s inclusion in public pension funds and other retail retirement accounts (e.g., 401(k)), especially given the well-characterized environment of limited transparency, illiquidity, and complexity, not to mention questionable conflicts of interest.
Action Line: Your Survival Guy isn’t alone in hoping that your 401(k) won’t become a dumping ground for high-fee, illiquid, opaque investments that institutional investors are looking to offload on some suckers. Click here to subscribe to my free monthly Survive & Thrive letter.
Read Hooke and Imerman’s entire analysis below:
Hooke Imerman DOL LetterRead the entire series here.
