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Hiltzik: Why don’t you have to put your 401k in private equity

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Hiltzik: Why don't you have to put your 401k in private equity

Ever looking for opportunities to make new money for the average American, the Trump administration earlier this month paved the way for a 401 (k) plan and similar individual accounts to invest in private equity funds.

According to Labor Secretary Eugene Scalia, this reflects President Trump’s determination, through the May 20 executive order, “to remove obstacles to the largest engine of economic prosperity the world has ever known: innovation, initiative, and encouragement of the American people.”

That’s a chance.

We have seen a number of proposals from private equity funds where the returns are really not calculated in a way that I think is honest.

Warren Buffett, May 2019

Private equity funds, which invest in companies not listed on the stock exchange and therefore do not have to report their finances or operations publicly, are among the riskiest and most opaque investment vehicles designed by Wall Street.

They often overload the acquired companies with large debts, reducing their long-term prospects even when they generate short-term profits for the promoter. And their capital may be tied to illiquid investment which makes it difficult for clients to get their money whenever they want.

Until now, ordinary Americans have been effectively banned from this sector because of the requirements of the Securities and Exchange Commission that they are only open to “Accredited” investors – generally those with income of at least $ 200,000 in recent years or net worth of at least $ 1 million, not including homes.

On June 3, however, The Department of Labor issues guidelines allows sponsors of a 401 (k) style plan to offer investments with “components” of private equity.

The agency does indeed place some restrictions on how the investment should be arranged. Direct investment in private equity companies by ordinary investors is still prohibited. Conversely, the private equity component must be placed in a larger diversified fund that has sufficient liquidity to pay off investors who want to get out immediately.

However, the change is a big advantage for private equity promoters, who have lobbied for years to get their gloves at an estimated $ 6.2 trillion in 401 (k) accounts and $ 2.5 trillion in each retirement account . They might hope that once the door is opened, some of the remaining restrictions will be erased.

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Is this sector a good idea for the average owner of 401 (k)? I don’t usually offer investment advice through this column, so let me say: If I tend to invest my 401 (k) money in private equity, I hope my family will arrange to have my head examined.

Scalia certainly didn’t see things like that. In announcing the new June 3 guidelines, he called the rules changing the way to “help saving Americans retire access to alternative investments that often yield strong returns.”

Private equity companies have kept money flowing to politicians in recent years.

(Center for Responsive Politics)

He said the aim was to “equalize ordinary investors … to ensure that ordinary people who invest for retirement have the opportunities they need for safe retirement.”

Watch that word “often.” That is a common weasel word, the subtext of which is “alternative investment” often not provide strong returns.

It is appropriate to observe that Scalia does not distinguish itself as a rank of labor champion, which makes it the perfect choice to lead Trump’s Department of Labor when he was appointed last year.

Only this month, Scalia opposed the Democratic proposal to extend $ 600 in federal unemployment benefits past July 1. At that time, he said, “the circumstances that originally asked for $ 600 plus-ups would change.” That’s debatable, because more than 20 million Americans remain unemployed today.

Private equity funds are known as alternative investments in part because they operate in an alternative reality to traditional investments: They produce limited disclosures, or no useful disclosures at all; there is no generally accepted formula for measuring returns; and they will incur a much higher management fee than conventional stock, bond or money market funds.

No less than experienced investors Warren Buffett warned his own shareholders far from this sector.

“We have seen a number of proposals from private equity funds where the returns are really not counted in a way that I think is honest,” Buffett said at the annual Berkshire Hathaway meeting in May 2019, which holds the company’s investment portfolio. “If I run a pension fund, I will be very careful about what is offered to me.”

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Charles Munger, vice chairman of Berkshire and Buffett’s longtime business partner, added his own observation that private equity firms sometimes extract reported returns by parking money in treasury bills but do not report ownership of low returns in their portfolio yields. “All they do is lie a little to make money,” he said.

Claims from the private equity sector to produce higher returns than conventional stocks and bonds have been regularly questioned. Whatever gross returns enjoyed by private equity firms are eliminated by fees collected by their promoters, usually 2% a year of the total value plus 20% of the profits.

As observed by Brett Arends from MarketWatch, by taking the average gross profit from the Standard & Poor’s 500 index at 12% per year (excluding inflation), private equity funds must set aside 17% gross profit per year just to equal the S&P 500. That’s not realistic, to say the least.

Analysis of notes written and posted after changes to the regulations of the Department of Labor by Ludovic Phalippou from Oxford University found that the gross return on private equity funds roughly matches the public stock index, but a disproportionate share of profits goes into the pockets of people in private equity.

“The number of PE millionaires,” he observed, “rose from 3 in 2005 to 22 in 2020, and most were affiliated with large PE companies.”

Private equity companies say that they remain popular among large institutional investors, which means they offer legitimate value.

Phalippou did not buy that argument. He attributed their popularity to conflicts of interest between institutional decision makers, and “low financial literacy between the two actors and even many agents – people who policymakers uniformly classify as” sophisticated investors. “

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Private equity companies have stretched into Republicans and the Trump administration through liberal applications of cold money and influence. In 2018, these companies contributed nearly $ 110 million to candidates and political action committees, and this year (so far) around $ 77 million.

These contributions were roughly divided between Republicans and Democrats in the last two election cycles.

But the largest private equity firm, Blackstone Group, has recently sent most of its contribution to conservative and Republican recipients – around $ 18.5 million from $ 21 million in 2019-2020. One of the founders and chair of Blackstone, Stephen A. Schwartzman, is chief adviser to President-elect Trump during the 2016 transition.

Schwartzman made no secret of his desire to get retail investors’ money. “In life you must have dreams,” he said Conference call January 2017 with Wall Street analysts.

“One of his dreams is our desire and the market needs to have more access in retail to alternative asset products. … At the moment many people are not allowed to put them in retirement vehicles and other types. And one of the interesting problems when you have a new government is whether they want to continue with such a ban or not. “

Get the instructions, Mr. President? (Kudos to David Sirota to dig up this invaluable nugget.)

To put Schwartzman’s wishes in perspective, Eileen Appelbaum of the Center for Economic and Policy Research calculated that only 5% of available funds from 401 (k) and Individual Pension Accounts would reach $ 435 billion – “real money even for private equity millionaires and billionaires, “He wrote. “The value proposition for workers, whose retirement income is likely to be depleted by costs for returns that may not be realized, is far less clear.”

He’s right. The median 401 (k) account does not have enough in it to support its owner through a long pension.

That is an argument for maintaining the balance of risks and rewards in their portfolios, not for taking leaflets on high-risk and questionable “alternative investments”.

If the Trump and Scalia Labor Departments really care about the prospect of retirement from rank, they will warn them to stay away from private equity, not to open the door wider.

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Portuguese historical films will premiere on 29 December.

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Portuguese historical films will premiere on 29 December.

Method Media Bermuda will present the documentary FABRIC: Portuguese History in Bermuda on Thursday, December 29 at the Underwater Research Institute of Bermuda.

A spokesperson said: “Method Media is proud to bring Bermuda Fabric: Portugal History to Bermuda for its 5th and 6th showing at the Bermuda Underwater Observatory. In November and December 2019, Cloth: A Portuguese Story in Bermuda had four sold-out screenings. Now that Bermuda has reopened after the pandemic, it’s time to bring the film back for at least two screenings.

“There are tickets Ptix.bm For $ 20 – sessions at 15:30 and 18:00. Both screenings will be followed by a short Q&A session.

Director and producer Milton Raboso says, “FABRIC is a definitive account of the Portuguese community in Bermuda and its 151 years of history, but it also places Bermuda, Acors and Portugal in the world history and the events that have fueled those 151 years.

“It took more than 10 years to implement FABRIC. The film was supported by the Minister of Culture, the Government of the Azores and private donors.

Bermuda Media Method [MMB] Created in 2011 by producer Milton Raposo. MMB has created content for a wide range of clients: Bermuda’s new hospital renovation, reinsurance, travel campaigns, international sports and more. MMB pays special attention to artistic, cultural and historical content.

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CRISTANO RONALDO CAN MAKE UP A GIANT IN CARIOCA AND PORTUGUESE TECHNICIAN SAYS ‘There will be room’

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CRISTANO RONALDO CAN MAKE UP A GIANT IN CARIOCA AND PORTUGUESE TECHNICIAN SAYS 'There will be room'

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Maestro de Braga is the first Portuguese in the National Symphony Orchestra of Cuba.

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Maestro de Braga is the first Portuguese in the National Symphony Orchestra of Cuba.

Maestro Filipe Cunha, Artistic Director of the Philharmonic Orchestra of Braga, has been invited to conduct the Cuban National Symphony Orchestra, as announced today.

According to a statement sent by O MINHO, “he will be the first Portuguese conductor to conduct this orchestra in its entire history.”

In addition to this orchestra, the maestro will also work with the Lyceo Mozarteum de la Habana Symphony Orchestra.

The concerts will take place on 4 and 12 March 2023 at the National Theater of Cuba in Havana.

In the words of the maestro, quoted in the statement, “these will be very beautiful concerts with difficult but very complex pieces” and therefore he feels “very motivated”.

From the very beginning, Rachmaninoff’s Piano Concerto No. 2 will be performed by an Italian pianist (Luigi Borzillo), whom the maestro wants to bring to Portugal later this year. In the same concert, Mendelshon’s First Symphony will be performed.

Then, at the second concert, in the company of the Mexican clarinetist Angel Zedillo, he will perform the Louis Sfora Concerto No. 2. In this concert, the maestro also conducts Tchaikovsky’s Fifth Symphony.

“This is an international recognition of my work. An invitation that I accept with humility and great responsibility. I was surprised to learn that I would be the first Portuguese member of the Cuban National Symphony Orchestra. This is a very great honor,” the maestro said in a statement.

“I take with me the name of the city of Braga and Portugal with all the responsibility that goes with it, and I hope to do a good job there, leaving a good image and putting on great concerts. These will be very special concerts because, in addition to performing pieces that I love, especially Rachmaninov and Tchaikovsky, I will be directing two wonderful soloists who are also my friends. It will be very beautiful,” concludes Filipe Cunha.

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