I had read about this vaguely a few years ago so how to even search for it was racking my brain. Apparently Eugene Scalia (Son of the "Constitutonal Originalism"..."I died in a donor-paid quail hunting trip" Antonin Scalia) was made Labor Secretary...a staunch employer-side litigator and the first of that ilk appointed to this position (very swampy if you ask me):
"One of the planned changes to retirement rules will open up 401(k) investments to high-risk, high-fee private equity funds. It’s a major break with past practices, but it wasn’t done through a formal rule process that would allow for scrutiny and public input.
Instead, in early June, the DOL sent a high-profile
information letter to Pantheon Ventures, a private equity firm, codifying conditions, such as a 15 percent cap, for a 401(k) to invest in private equity. The letter formalized private equity’s entry into the 401(k) marketplace, creating a blueprint for copycats and sending shockwaves throughout both sectors.
Private equity is a type of hedge fund comprising private investors who buy privately held, struggling companies in order to rehabilitate or liquidate them, collecting extremely high fees and enriching shareholders
either way. Direct investments in private equity and other types of hedge funds are typically restricted to high-net-worth individuals or institutions. This is because high-net-worth individuals and large institutional investors have extra, discretionary money to handle private equity’s
huge risks,
long-term illiquidity,
astronomical fees, and “capital calls,” investor fundraisers demanded at the drop of a hat. In other words, high-net-worth individuals and huge institutional investors can afford to burn that money if the investment goes south.
The average retirement investor, however, has always been considered uniquely reliant on their savings, which is why ERISA’s fiduciary duty requires a very conservative investment strategy. Considering private equity’s many risks and costs, the government, until now, and
401(k) plaintiffs’ attorneys have largely opposed it in retirement plans.
According to Wally Okby, a senior analyst at Aite Group, the pool of available capital from high-net-worth investors for private equity has recently dried up. And considering the shrinking state of pensions, private equity is chomping at the bit to enter the $8.9 trillion 401(k) marketplace. “They’re looking for cash anywhere they can get it,” Okby said. “Therefore, they go to 401(k)s, where investors typically don’t understand what they’re investing into.”
The letter is part of a broader
private-equity lobbying,
pressure campaign, and
creation of
complicated fund structures designed to prey on more of Americans’ hard-earned savings.
Clayton and
other lawmakers have made several moves to
lower barriers for
private fund access to Main Street investors. On July 28th,
one senior SEC director at a conference openly solicited the financial-industry attendants on what SEC rules should be changed to open up working people’s money to hedge funds and private equity.
The letter also comes in light of
a recent SEC warning that some retail fund managers have been receiving undisclosed kickbacks from private-equity investments.
The industry has supported the letter on the disputed belief that private-equity investments outperform the stock market at large. George Gerstein, an attorney for the financial industry and co-chief of fiduciary governance at Stradley Ronon, believes that increased private-equity exposure will increase performance of retirement plans, especially as a counterweight to other economic headwinds. But a recent study at Oxford University found that, after fees, top private-equity funds have performed no better for pension funds over 15 years than if the money were passively indexed to the stock market.
Further, private-equity disclosures lack any standard date or metrics, so its disclosed performance data is inherently misleading,
Roper argued."
So in theory fiduciary duty would at least provide some guard rail even if this bullsh*t went through...which is why Scalia wanted to change what fiduciary duty meant:
"Labor unveiled its second major shift, a proposed update to the breadth and depth of the retirement professional’s fiduciary duty — money managers’ requirement to provide the best possible service or face liability.
The proposed
rule would reduce the fiduciary duty to cover fewer transactions and parties, opening up enormous loopholes wherein a retirement professional has to uphold their fiduciary duty.
Shockingly, it would also allow any retirement professional to receive third-party payments for their recommendations, so long as they adhered to an undefined “best interest” standard and didn’t “materially” mislead investors. This part of the rule is perhaps akin to a doctor being allowed to take kickbacks in exchange for prescribing certain pharmaceuticals. Scalia
said his rule expanded “investor choice.”
Some statements of assessment of Scalia's positions:
Andy Behar, CEO of As You Sow, a nonprofit that rates the financial sector for its ethical standards, said that Scalia’s three most recent DOL rulemakings suggest a personal vendetta. “He’s couldn’t win as an attorney, so he’s changing the rules,” Behar said.
“Secretary Scalia is still working for his former clients,” said Barbara Roper, director of Investor Protection at the Consumer Federation of America. “This is a multipronged attack on Americans’ retirement security.”
