J.J. at the English language Wikipedia / CC BY-SA

June 13, 2020; Forbes and the New York Times

The Trump administration has been a stalwart crusader for easing and eliminating government rules and regulations in the name of government efficiency. One of first acts was to issue an executive order setting out an aggressive goal: “For every new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process.”

Vital safeguards affecting all aspects of our lives have been loosened or removed. In the process, the wealthiest Americans have seen their fortunes enhanced.

In early June, the Department of Labor, following this mandate, made saving for retirement riskier and gave some investment advisors a multimillion-dollar gift. New guidance removed a rule that limited Individual Retirement Accounts (IRAs) and 401K retirement accounts to investments “in mutual funds, bank collective investment trusts, and insurance company pooled accounts with portfolios focused on publicly traded stocks and bonds.” Those who manage the retirement funds of more than 100 million people, which contain $8.6 trillion dollars in total, can now shift money into riskier, less well-regulated private equities.

According to Labor Secretary Eugene Scalia, taking these restrictions away “will help Americans saving for retirement gain access to alternative investments that often provide strong returns” and “level the playing field for ordinary investors.”

Individual participants in IRAs and similar programs were not lobbying for this change; it was made to please private equity managers, many of whom were strong supporters of President Trump. These fund managers see a golden goose. The ability to attract even a small portion of this new market brings great rewards, as they often charge fees much higher than more traditional investments.

Stephen Schwarzman, CEO of Blackstone Investments, was one of those who saw potential if this door could be opened. As reported by David Sirota, he greeted President Trump’s inauguration by making a case for policy change. “In life you have to have a dream. One of the dreams is our desire and the market’s need to have more access at retail to alternative asset products.” The Trump administration has now made this dream come true.

These alternative assets come with great risk. According to the New York Times, these investments can be “opaque.”

Companies in such portfolios don’t have to disclose as much information as publicly traded businesses. Investors also can’t cash out as easily as they can with public investments. Money is often locked up for eight to 10 years at a time.

What’s more, the experiences of public pension funds, which have for years been allowed to invest in private equity, have not been positive. Gary Rivlin, writing for the Intercept, relays some data from a few years ago:

A 2018 report by the conservative Maryland Public Policy Institute put a price tag on those mediocre results. The group compared the actual performance of the $49 billion Maryland State Retirement and Pension System against a model with a straightforward “60–40” approach, in which 60 percent of a portfolio is invested in stocks and 40 percent in bonds. Despite the hundreds of millions of dollars in additional fees the pension system had paid to private equity firms and hedge funds, it would have earned an additional $5 billion over the prior 10 years had it adopted the more judicious 60–40 strategy.

Writing for Forbes, Eric Siedle highlights how the Trump administration ignored this, acting as if it were “unaware of a decade-plus of private equity investing by so-called ‘well-managed’ pensions has resulted in increasingly disappointing, not to mention inflated and unauditable performance results.” Quoting Warren Buffett, who he calls “arguably the world’s most respected investor,” Siedle recalls a statement made last year’s Berkshire Hathaway annual meeting: “We have seen a number of proposals from private equity firms where the returns are not calculated in a manner that I would regard as honest….if I were running a pension fund, I would be very careful about what was being offered.”

This act by the Trump administration is another step in an ongoing campaign to entrust the security of retirement to the vagaries of an increasingly volatile securities marketplace. The traditional, defined-benefit pensions that once provided certainty to retirement income are fading away. Republican leaders continue to advocate for converting Social Security to an IRA-like program that mirrors the investment market.

Meanwhile, those who manage investments earn their commissions whether the returns are good or bad. Those who depend on those funds’ performance to pay their rent and put food on their tables once their working days have ended don’t have that guarantee.

This is one more example of how we risk abandoning the hard-won safety net protections that made sure aging was not synonymous with poverty. Siedle warns that those who chose to use risky investments in the retirement programs should “prepare to be bitten.” For our country, that bite will be to the retirement security of millions of Americans.—Martin Levine