When former president Donald Trump paved the way for his private equity donors to skim fees from Americans’ 401(k) retirement accounts, Joe Biden’s campaign denounced the stealth executive action and promised to oppose such changes if he won the presidency. But less than two years later, Biden’s administration just quietly cemented that same policy, delivering a gift to the Democrat’s own finance industry sponsors, even as federal law enforcement officials are warning of rampant malfeasance in the private equity industry.
At issue is a Trump Labor Department ruling in 2020 that authorized retirement plan administrators to shift workers’ savings into high-risk, high-fee private equity investments, despite regulators’ long-standing interpretation that federal laws prohibited such moves.
Trump Labor Department officials touted the reinterpretation as a way to “help Americans saving for retirement gain access to alternative investments that often provide strong returns.” The letter followed Blackstone Group CEO Stephen Schwarzman, a Trump adviser and major donor to his super PAC, saying that accessing the $7 trillion in Americans’ 401(k) was one of his company’s top goals.
At the time, Biden’s campaign criticized the Trump move, telling the American Prospect that the Democratic nominee “staunchly opposes regulatory changes that will lead to skyrocketing fees and diminished retirement security for savers. This regulatory action is another example of President Trump putting the interests of Wall Street ahead of American workers and families.”
Though the new letter does include warnings about the risks of private equity, it avoids rescinding the Trump initiative. On the contrary, it explicitly affirms that retirement administrators with “experience evaluating private equity investments . . . may be suited to analyze these investments for a (401k) plan, particularly with the assistance of a qualified fiduciary investment adviser.”
“Biden’s Department of Labor could have and should have made a stronger statement about the unsuitability of private equity products for workers’ defined contribution retirement savings and the inability of nearly all brokers to evaluate private equity products,” said the Center for Economic and Policy Research’s Eileen Appelbaum, who coauthored the book Private Equity At Work.
Last week, the conservative-dominated US Supreme Court handed down a ruling empowering 401(k) holders to sue finance executives that invest their savings in inappropriately risky or predatory private equity investments.
However, Biden’s Labor Department has effectively blessed such investment strategies. Indeed, industry lawyers and investment executives are already celebrating the letter as a precedent setting ruling potentially opening trillions of dollars of Americans’ retirement savings up to higher-fee investments.
“We believe this is a settled matter now,” said a finance executive at Partners Group, the Switzerland-based investment firm that spearheaded the lobbying push for the letter, according to Bloomberg Law.
Appelbaum, however, said that especially with the recent court ruling, the threat of retiree lawsuits could still deter retirement plan administrators from moving quickly into higher risk, higher fee investments.
“Much as private equity firms may wish it were different, they have been mostly unable to worm their way into workers’ 401(k)s and abscond with their retirement savings,” she told Jacobin.
A Gift to the Donor Class
Whatever happens next, the Labor Department precedent is a win for the private equity industry, which has made billions in fees off traditional public pensions and is eager to tap the even bigger pool of worker savings in 401(k) accounts and other so-called defined contribution retirement plans.
Trump’s original letter was a particularly sweet victory for Schwarzman, whose company, Blackstone, is the largest private equity firm in the world.
“In life you have to have a dream,” Schwarzman said in 2017. “And one of our dreams is our desire and the market’s need to have more access at retail to alternative asset products.”
Blackstone also has its tentacles in the Biden administration.
Biden’s election bid was boosted by $350,000 worth of donations from top Blackstone executives to a super PAC backing his campaign. One of his top 2020 fundraisers was Jon Gray, the heir apparent to Schwarzman.
In all, Biden’s campaign raked in more than $3.8 million from donors at private equity and investment firms, according to OpenSecrets.
A Blackstone executive recently chaired and serves on the board of directors of the Institute for Portfolio Alternatives, which has been lobbying the Biden Labor Department on “issues relating to 401(k) defined contributions,” according to federal records.
Law Enforcement Alarm
The Biden administration’s ruling to help private equity titans access retirees 401(k) accounts coincides with his own law enforcement agency sounding a loud alarm about the industry’s practices.
Last week, the Securities and Exchange Commission (SEC) issued a risk alert saying that the agency’s examiners are finding pervasive malfeasance and fraud throughout the private equity industry.
The report found some firms haven’t been calculating management fees according to the terms in their fund disclosures, which “resulted in investors paying more in management fees than they were required to pay.”
It also found money managers employing schemes that “diverged materially from fund disclosures,” giving investors “inaccurate or misleading disclosures about their track record,” and presenting “inaccurate performance calculations to investors.”
Those investigations followed a leaked FBI report warning that private equity and hedge fund investments were being used in “support of fraud, transnational organized crime, and sanctions evasion.”
“In my nearly 40 years experience conducting forensic investigations of over $1 trillion in defined contribution and defined benefit plans, I have never met a plan fiduciary capable of digging deeply into private equity offerings or a private equity firm willing to be fully transparent,” said Ted Siedle, a former SEC attorney who represents whistleblowers in the financial industry.
“Any 401(k) fiduciary who believes he is capable of evaluating these high risk high cost investments is naive,” he said. “It is incumbent upon the Biden administration to set the record straight: private equity investments are inherently inappropriate for 401(k)s as it is impossible for plan fiduciaries to monitor them.”