“A Windfall of $435 Billion”

To the casual onlooker, the information letter from the Employee Benefits Security Administration reads like every other impenetrable passage of stereo instructions that fills the Federal Register — but this was no routine piece of paperwork. The guidance to Switzerland-based investment firm Partners Group effectively changed the enforcement of federal law protecting workers’ retirement savings.

While long-standing worker-protection regulations have prevented 401(k) plans from investing in high-risk private equity firms, the letter now permits corporations to funnel that money to those firms, which charge notoriously giant fees.

Trump’s administration argued that workers should feel fortunate and thankful that the administration will now let employers turn their savings over to private equity barons.

“This information letter will help Americans saving for retirement gain access to alternative investments that often provide strong returns,” labor secretary Eugene Scalia said in a statement announcing the new policy. “The letter helps level the playing field for ordinary investors and is another step by the department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”

Scalia previously represented Wall Street banks and investment firms at the law firm Gibson Dunn, including Goldman Sachs, which has been working to raise more money for its private equity funds.

In practice, private equity firms will now be allowed to access — and skim fees off of — the $9 trillion in 100 million workers’ 401(k) plans and IRAs.

“If just 5 percent of the money in these retirement funds were available to private equity, it would be a windfall of $435 billion — real money even to private equity millionaires and billionaires,” wrote Eileen Appelbaum of the Center for Economic and Policy Research (CEPR).

“A Huge Opportunity for the Firm”

From the beginning, Trump’s White House has been operating as a de facto subsidiary of the private equity industry: his reelection campaign is being bankrolled by private equity donors; his commerce secretary is a private equity kingpin; his SEC chairman was a Wall Street lawyer at a firm that represents private equity clients; his first National Economic Council was the president of a private equity giant; and his top outside adviser is Schwarzman, the CEO of the world’s largest private equity firm, Blackstone.

The Labor Department letter is the result of all that private equity influence — and at a particularly opportune time. The industry — including Partners Group — has recently been fretting about a decline in fees during the COVID-19 pandemic. The letter offers the potential for a bailout for the industry, paid for by millions of workers’ retirement savings.

That said, this is not some temporary relief during a fleeting crisis — this is the culmination of a long-term campaign by Schwarzman. Six days after Trump was inaugurated, the Blackstone chief said that he had been dreaming of a president who would change the law to let his firm make bank off workers’ 401(k) savings.

“In life you have to have a dream,” Schwarzman told analysts in January 2017, days after Trump’s inauguration. “One of the dreams is our desire and the market’s need to have more access at retail to alternative asset products . . . A lot of people are not allowed to put those into retirement vehicles and other types. And one of the interesting issues when you have a new government is whether they want to continue that type of prohibition or not. Because what it’s doing is denying people sort of a better retirement, and if there’s a change in that area that becomes a huge opportunity for the firm.”

In the ensuing years, Schwarzman and other private equity moguls continued to deliver cash to Trump’s national Republican Party while the industry pushed for the changes in law that would allow them to raid 401(k) savings.

“This Wealth Transfer Might Be One of The Largest in the History of Modern Finance”

Like Shelley Levene’s smarmy real-estate sales pitch in Glengarry Glen Ross, Schwarzman’s argument is that private equity offers ordinary Americans terrific untapped investment upside. In his telling, workers have been unfairly deprived of these opportunities under the old laws — and not surprisingly, both the Trump Labor Department and some of the business press have credulously echoed that line.

“Everyday investors may soon be able to get a piece of private equity action,” effused the lede of the New York Times’ report on the Labor Department letter, as if this is a sweet get-rich-quick opportunity for the average working man.

But only days after the change, a landmark study was released, telling the real story of private equity.

The report by University of Oxford professor Ludovic Phalippou shows that in the last fifteen years, private equity firms generally have not provided better returns to investors than low-fee stock index funds. In the process, a handful of private equity firms and their executives have raked in roughly $230 billion in fees from investors like public pension funds and university endowments.

“This wealth transfer might be one of the largest in the history of modern finance: from a few hundred million pension scheme members to a few thousand people working in private equity,” Phalippou concludes.

Politicians have enabled this redistribution.

In Washington, federal lawmakers have preserved a tax loophole that allows private equity moguls to classify their winnings as capital gains rather than income, thereby paying far lower tax rates than ordinary workers.

Meanwhile, in states and cities, local officials have continued to direct more and more of government workers’ pension savings to politically connected private equity firms. Those officials have been hoping that private equity investments would produce outsize returns that might forestall tax hikes necessary to raise revenue and fund the pension benefits promised to public-sector workers. But overall, those returns were not significantly better than the stock market, and they came with giant fees.

In its letter, the Trump administration actually acknowledged some of these pitfalls of private equity investments, noting that they involve “more complex, and typically, higher fees.” But that wasn’t enough to stop the Labor Department from shoving millions of unwitting workers and retirees into private equity’s maw just a few years after Blackstone and other major private equity firms were sanctioned by regulators for fleecing investors.

The Quest for Dumb Money

The private equity industry is hardly short on cash — the industry was sitting on roughly $1.5 trillion of undeployed capital at the end of 2019. The reason the Labor Department letter is so important to the industry is because 401(k)s and IRAs represent a particular kind of capital that private equity firms love — so-called “dumb money.”

Unlike a share of publicly traded stock whose price is the same for all investors, a private equity investment’s fees can vary widely from investor to investor. Private equity firms are therefore always eager to find investors willing to accept the highest possible fees. “Dumb money” refers to such investors — entities like pension funds, 401(k) plans, and university endowments that are pools of other people’s money directed by officials with no personal skin in the investment decisions.

Wall Street sees these funds as “dumb” — and particularly lucrative — because the officials negotiating on retirees’ or universities’ behalf may not drive as hard a bargain on fees and terms as, say, an individual billionaire or an insurance company trying to protect its cash reserves.

This wiggle room with dumb money can be enormously lucrative for private equity firms: a recent study by Stanford and Harvard researchers found that had public pensions all received the same private equity fee rates, they “would have earned nearly $45 billion more on their investments.”

In other words: that is $45 billion of earnings that could have gone to retirees, but instead went to private equity firms and other wealthy investors because pension fund managers didn’t secure better fees and terms.

That part about “other unobserved investors” is key — private equity firms explicitly say in their SEC filings that they can and will offer different investors different fees and terms on the exact same investments. It is a situation that has caused some retirees to wonder whether their dumb money is being used to pad the profits of smarter, politically connected investors who negotiate better terms in the same private equity investments.

Now that Trump’s Labor Department has opened the floodgates, a lot more money could end up flowing into these opaque deals, enriching private equity executives and their friends — while leaving workers’ meager retirement savings even further depleted.