DOL's brass denounces Biden for stifling private 401(k) investments, yet bars plan participants -- even plan sponsors -- from picking direct investments; deferring to 'the BlackRocks of the world'
The Labor Secretary admonished how the former administration 'put its thumb on the scale to pick winners and losers,' but admits that investors still have no say in picking assets.
5 min read
Brooke's Note: If you're betting that private investments will finally take flight because of the Trump Department of Labor … don't. As we quoted Vanguard CEO Salim Ramji yesterday, it's going to be a long time, a very long time, before private investments go airborne. If you read this article, you'll see where the rhetoric ends and reality begins. I talked to a real estate company owner in Albany, NY, who put a fine point on it – along with a crack ERISA attorney in Jason Roberts. “Fiduciary” is one problem. Liquidity is probably a bigger one. But even if you know all that, read the article just to hear the quotes from DOL bureaucrats blasting their own kind. It takes one …
The Department of Labor (DOL) again lambasted former President Biden today (Aug 12) for policies it claimed were harming “hardworking Americans” by discouraging private investments in 401(k) plans.
The DOL’s Employee Benefits Security Administration rescinded a Dec. 21, 2021 Biden-era statement discouraging fiduciaries from considering alternative assets in 401(k) retirement plan investment menus.
“Instead of allowing Washington bureaucrats to call the shots, we believe plan fiduciaries should decide which retirement investment options are best for hardworking Americans,” said Trump Labor Secretary Lori Chavez-DeRemer in a statement.
The Biden statement reversed a letter issued during President Trump's first administration in 2020 that encouraged alternative investments.
“This is just another example of how the Biden administration put their thumb on the scale to pick winners and losers,” Chavez-DeRemer asserted.
Yet, experts say the DOL's contempt for “bureaucrats” doesn't change the fact that individual investors are still entirely barred from picking "winners and losers" when it comes to making direct private investments with their 401(k) dollars.
“Instead they're going to give it to the BlackRocks of the world,” said Todd J. Drowlette, managing director of TITAN Commercial Realty Group in Albany, NY.
The Department of Labor declined to comment on whether direct investments are contemplated now – or ever.
Waving the flag of 'capital formation,' SEC promises to let the genie out of the bottle, allowing private funds in 401(k) plans; DOL silent
‘Reckless’
The decision to rescind the previous supplemental statement follows President Trump’s latest Executive Order, “Democratizing Access to Alternative Assets for 401(k) Investors.”
It directs the Department of Labor to reexamine its guidance regarding fiduciary decisions, and calls for a fund with alternative assets to ensure it is available to plan participants, according to a statement.
“The EO is reckless,” wrote David Zweig, author of the Intelligent Investor column in The Wall Street Journal.
“It seeks to reconstruct fiduciary principles to fit alternative investments. Alts are far more costly, complicated, opaque and risky than typical 401(k) investments consistent with fiduciary duties. “Illiquid” is their middle name.”
“We are not talking about alts as standalone investment options into which participants could direct the entirety of their retirement savings,” says Jason Roberts, CEO of Pension Resources Institute, in an RIABiz interview.
Story Timeline
“Rather, we are talking about an allocation to some form of private investments within a diversified, professionally managed fund or account. Most of the asset managers we are working with are using target date funds or managed accounts, for example," he said.
Roberts adds that Chavez-DeRemer's sense of urgency was not based on a slipping deadline. “It’s worth noting that she had 175 days left to ‘consider whether to rescind’ it,” he quipped.
Legal, operational issues
Dept. of Labor throws its 2020 self under the bus and walks back Trump-era guidance that appeared to open the door to private equity investments in 401(k) plans
Drowlette says the president's executive order initially got his hopes up. It could do so much both for individual investors and for private industry if its deliverable matched its rhetorical brio.
“If they actually allowed Americans to invest in the way that they [make it sound,] it would be amazing,” he says.
But Deputy Secretary Keith Sonderling reinforced Drowlette's take by clarifying that the latitude to add some private investments will fall to makers of “retirement product,” namely Wall Street.
The problem with handing it to Wall Street decision-makers is that there are so many layers of fees and diversification that any effect on returns is severely whittled away, Drowlette says.
“In real life, investors are marginally better off, maybe by a point.”
He adds that it's a real shame because investors in self-directed IRAs have proven that they can ably invest in alts.
Punting to Wall Street
Indeed, no lip service is being paid currently to direct investments, said Roberts, citing a letter from DOL to Pantheon Ventures and Partners Group in 2020 that explicitly denied the possibility.
The letter reads: "This letter does not address any fiduciary or other ERISA issues that would be involved in a defined contribution plan allowing individual participants to invest their accounts directly in private equity investments.
“Such direct investments in private equity investments present distinct legal and operational issues for fiduciaries of ERISA-covered individual account plans.”
The Trump 2020 DOL letter cleared retirement plan administrators of potential fiduciary violations under ERISA if they included private equity in plan portfolios.
It reads in a footnote: “Such direct investments in private equity investments present distinct legal and operational issues for fiduciaries of ERISA-covered individual account plans.”
Roberts says logistical issues around liquidity and other alts limitations are big reasons why the executive and DOL guidance is specific to asset allocation funds versus standalone alts.
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