Washington Just Threw 401(k) Owners Under the Bus

In granting private equity funds access to 401(k) plans, the Department of Labor is allowing for “the highest cost, highest risk and most secretive investments ever devised by Wall Street.” Here’s how it could trickle down to you.

401k with people walking in front of it

401k risk

Photo by Flickr.com | CC BY | Photoshopped

From Birch Gold Group

Based on a letter issued by the U.S. Department of Labor, it appears that the door is now open for 401(k) plan administrators to add higher-risk private equity investments.

U.S. Secretary of Labor Eugene Scalia is unusually optimistic, saying in the letter:

This Information Letter will help Americans saving for retirement gain access to alternative investments that often provide strong returns... 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.

This optimism may be because private equity investment firms have been eying 401(k) plans for some time. A recent Forbes piece describes this DOL letter as a "win" for them, as 401(k)s hold nearly $9 trillion in assets. However, the piece warns:

[It's] a monstrous setback to American workers who invest in 401ks for retirement security.

So in a move that should come as a surprise to no one, a "win" for private equity could be a loss for retirement savers, as this change could result in less secure savings vehicles.

To make matters even worse, 401(k) account owners could soon be saddled with skyrocketing administration fees.

Higher 401(k) Risk Can Eat Away At Any Gains

We've covered how 401(k) fees could reduce your retirement savings by as much as 17% over time, so adding higher risk and potentially higher fees won't improve the situation.

Last year, CNBC actually reported that higher fees could kill the tax benefits of a 401(k):

A comprehensive 2015 academic study found that in 16% of 3,500 plans analyzed, fees were so high that they "consume the tax benefits of investing in a 401(k) for a young employee."

Since 37% of Americans don't even know they are paying fees in the first place, there's a good chance they also don't know that their tax advantage could be completely offset by those fees.

So, 401(k) plans could have more risk. They could have higher fees. And there's even more bad news on the changes that may be coming...

How "Improved" Investor Choice Could Be a Bad Thing

The DOL letter claims that offering higher risk private equities will "improve investor choice and investor protection" for retirement savers in light of the Coronavirus pandemic.

They will certainly offer more choice, but it's unclear what "protection" equity firms will offer.

In fact, according to the same Forbes article, the SEC has found trouble lurking inside some private equity investment firms:

SEC staff examinations of private equity firms have reportedly found that more than half allocated expenses and collected fees inappropriately and, in some cases, illegally.

The Forbes piece finishes with a warning, arguing that those 401(k) plans that consider risky investments could be on their last legs:

In my experience investigating over $1 trillion pensions, struggling plans almost always migrate to riskier, costlier investments in their final hours to save themselves—a Hail Mary that, predictably, only hastens their demise.

Hopefully, your 401(k) plan isn't in its final hours, but now would be a good time to check.

Time for a Retirement Plan Review

As more 401(k) plan administrators consider risky investments like private equities, that is a loud and clear signal for you to examine your own retirement.

Consider your risk exposure, asset classes, and how your savings are diversified to mitigate risk. Then make necessary changes while there is still time.

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