Trump administration move could add 'significant risks' to retirement accounts
When it comes to a 401 (k) account, most savers simply choose a target date fund and leave it at that.
Thanks to a rule change by the Trump administration, these retirement vehicles could soon be much more complicated. This is likely to lead to new risks (and possibly new returns) for savers.
Managers of 401 (k) plans can now invest in private equity. In other words, your 401 (k) could soon acquire shares in private companies.
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According to Labor Minister Eugene Scalia, the goal is to provide investors with access to alternative investments and to ensure that ordinary people who invest in retirement have the opportunities they need for safe retirement. The Department of Labor stated in a letter that depositing 401 (k) money in private equity funds would not violate “fiduciary duties” of certain pension plan sponsors.
However, some experts see a big disadvantage.
Barbara Roper, director of investor protection at the Consumer Federation of America, said the "significant risks" associated with private equity investments had not been adequately addressed.
"According to the Department of Labor, it is an investment that is more complex, opaque, less liquid, and more difficult to value, and often costs more than the investment traditionally offered through pension plans," Roper said in an interview with Yahoo Finance.
You could make it much, much worse.
The DOL letter means that a 401 (k) manager could now decide to invest in private equity funds that were previously inaccessible. These funds are traditionally reserved for the richest traders and institutional investors. They are usually more risky because private companies do not have to disclose nearly the same data to the SEC as public companies.
The new rule could be tempting to average savers who may now have a detour to get a piece of a company - like SpaceX or AirBnB - that is still private. The American Investment Council, which represents the private equity industry, has praised the change and said it will strengthen Americans' pensions.
One thing that stays in the air is how quickly the managers of large pension plans will accept their new options. Companies like Vanguard and Fidelity have not yet commented on the new guidelines. Another open question is whether these plans would list private equity funds under the options for savers or whether private equity would simply be mixed into existing funds.
Labor Minister Eugene Scalia, right, says the change will allow investors to "gain access to alternative investments" (Alex Wong / Getty Images).
Alexis Leondis, a Bloomberg opinion columnist, recently asked if the move was worth the risk. "Many plan sponsors lack the sophistication or background of alternatives to fully understand the complex structures of many private equity funds," she wrote.
Roper said that "the spread of returns in private equity funds is huge, much broader than in public markets." And while yields for above average private equity funds can actually outperform public markets, "you could do much, much worse if you get into a below average fund," she said.
An example of a major disadvantage of the private equity fund is the SoftBank vision fund. This fund recently announced $ 24 billion in losses after investments in WeWork and OneWeb failed.
According to a 2018 study by the Stanford Center on Longevity, about half of American workers save money at work through a pension plan. Access to and participation in 401 (k) s is much lower among younger workers. A report from the National Institute for Old Age Insurance found that two-thirds of working millennials saved nothing for retirement.
A second rule change on financial advice
A second change is planned soon and is expected to ease the restrictions on advising financial professionals on their retirement investments.
The change that the SEC passed last year with a compliance deadline of June 30 stipulates that, at the time of the referral, brokers “must act in the best interests of the retail customer without placing your financial or other interest before that of the retail customer Interests. "
SEC chairman Jay Clayton said the change was part of "raising the standard of behavior for broker-dealers" while interviewing to discuss how the best interest standard differs from a trust standard.
According to the Consumer Federation of America, the move could lead to the understanding that investment advisors are not real trustees. A trustee is someone who is legally required to act in the best financial interest of the clients he advises.
According to Roper, this potential new rule offers broker-dealers and investment advisors "practically unlimited opportunities to act as advisors while not regulating them accordingly". They can now "mislead their clients into believing that if they actually receive investment recommendations that are distorted by toxic conflicts of interest, they will receive trustworthy advice of the best interest," she said.
Roper was part of Yahoo Finance's ongoing partnership with the "Financing Our Future" campaign, a group of organizations working to improve retirement security for Americans.
The Consumer Federation of America is an association of non-profit consumer organizations. More than 250 groups - from local agencies such as the New York Department of Consumer Affairs to private groups across the country - participate in the federation.
All of these changes may not be noticed by certain savers, who are often encouraged to take an approach that fixes and forgets them when they retire. When your 401 (k) provider ultimately gets involved in private equity, proponents like Roper say that "the promise of performance improvement is not necessarily fulfilled by reality".
Ben Werschkul is a producer for Yahoo Finance in Washington, DC.
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