Biden Endangers 401(k)s as He OKs Private Equity

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Stephen Schwarzman, co-founder, chairman and chief executive officer of Blackstone Group LP, left, speaks as U.S. President Donald Trump listens during a Strategic and Policy Forum meeting in the State Dining room of the White House in Washington, D.C., U.S., on Friday, Feb. 3, 2017. The gathering of the 18-member group, led by Schwarzman, will give America’s first billionaire commander-in-chief a chance to reprise his “Apprentice” role on a grand scale. Photographer: Andrew Harrer/Bloomberg

 

 

A recent decision by the US Department of Labor and the Biden administration to allow private equity funds into 401(k) plans is a huge payoff to major Wall Street investment companies who will now allow investors to be exposed to high-fee, high-risk private equity funds. 

In the latest setback for investors, the Biden administration’s Department of Labor (DOL) has made a 100% reversal from Biden’s earlier proposal to oppose the extension of private equity investment into 401(k)s.

Biden earlier rejected this idea of allowing private equity into 401(k)s when the proposal was made by Donald Trump.  At that time, “Biden’s campaign criticized the Trump move, telling the American Prospect that Biden “staunchly opposes regulatory changes that will lead to skyrocketing fees and diminished retirement security for savers. This regulatory action is another example of President Trump putting the interests of Wall Street ahead of American workers and families.”

It now looks like what Biden “staunchly opposes” changes every day.

As the attached article in the Daily Poster very ably points out, private equity is a high-fee, high-risk investment with a spotty track record that is not suitable for average investors.

So Why Did Biden Change His Mind on Private Equity?

The boilerplate answer to this question from the US DOL about why the allowed private equity funds into 401(k)s is that investors can now pursue the remote possibility of high returns from private equity (PE). But PE is known for high, hidden fees, many of them undisclosed and hard to decipher, that all reduce an investor’s net return.

As the Daily Poster notes: “Whatever happens next, the Labor Department precedent is a win for the private equity industry, which has made billions in fees off traditional public pensions and is eager to tap the even bigger pool of worker savings in 401(k) accounts and other so-called defined contribution retirement plans.”

How much fee income are we talking about? One expert cited in the Daily Poster estimated these fees that will be paid by 401(k) participants to be near $13.7 billion annually.

To get the DOL’s OK, the Biden administration is rewarding the private equity industry for its large campaign donations. These came from a few private equity funds, but the largest was from the Blackstone Group, whose president Steve Schwartzman, was a major donor to Trump and Biden. Blackstone is the largest PR firm in the US.

As noted in this article on this site, a Bloomberg news found that Schwartzman, “the private equity mogul single-handedly accounts for the vast bulk of the reported contributions toward Trump’s re-election effort over the past 18 months from people associated with the 31 banks and investment firms that dominate the U.S. financial industry.”  His contributions alone amounted to $3.7 million of the $4.8 million from this group of private equity firms and banks. 

As for Biden, the Daily Poster said “Biden’s election bid was boosted by $350,000 worth of donations from top Blackstone executives to a super PAC backing his campaign. One of his top 2020 fundraisers was Jon Gray, the heir apparent to Blackstone CEO Steve Schwarzman (in the photo with Trump.)  In all, Biden’s campaign raked in more than $3.8 million from donors at private equity and investment firms, according to OpenSecrets.”  Now, it looks like the Biden administration has paid off the private equity industry.

Biden is No Different Than Other Corporate Dems

Taking donations from the financial services industry is endemic to both Republicans and Democrats.  It is just part of the entire election process where large donors give money to candidates to change laws, regulations and evade prosecution.

A great example comes from the 2008 mortgage fraud activities that caused the 2008 recession. At that time, Obama and former Attorney General Eric Holder never prosecuted the mortgage fraudsters responsible for the 2008 housing market collapse and resulting recession.

As noted in this 2016 article on this site, if Holder-Obama would have prosecuted the fraudsters, they would have ignited a populist sentiment that showed Dems were not blind corporate protectors. But both Obama and Holder were corporate lawyers first and foremost, so they did not want to alienate future clients and contributors. But Obama and Holder failed to prosecute the fraudsters. This gave Trump an inroad to say he was a populist, a claim that fooled many and gave him traction as a “man of the people.”

If Obama would have prosecuted the mortgage fraudsters, Hillary Clinton would have been elected president.

But Obama, Holder, and Michelle Obama were all corporate lawyers, so alienating future clients was out of the question. This explains the explosive gain in their wealth. According to Celebrity Net Worth, Barack Obama has a 2021 net worth of $70 million.  Eric Holder worked at the law firm of Covington & Burling in Washington, D.C., representing the firm’s multinational corporate clients in litigation. Today,  Holder has a net worth of $11.5 million dollars.

Eliminate the Carried Tax Interest Loophole

The best approach is to support proposals by Democrat Progressives, including Sen. Elizabeth Warren, to close the Carried Interest Loophole. As noted in numerous articles on this site,  carried interest is a tax gift to a greedy segment of the financial industry to evade paying taxes.

Carried interest is an accounting provision that allows any profits earned by the general partner of a private investment fund to be treated as a long-term capital gain. These gains are taxed at a lower rate than ordinary income.

It also must be noted that this tax loophole was never voted on as a law. It was part of a revenue action issued by the Internal Revenue Service in 1993 and originally applied to real estate transactions.   According to Slate, the IRS tried to address when a piece of property was sold or traded in the future and determine how it would be taxed.  The IRS called this a “realization event,” and if the transaction occurred over a year after the real estate was acquired, the tax would be considered on a long-term capital gain.  When carried interest was developed, hedge funds were not popular.

In this 2015 article posted here, Obama, like Biden, made campaign promises to close this tax loophole that favor private equity funds, hedge funds, and real estate developers. This carried interest loophole allows these hybrid financial firms to pay ordinary income tax rates on their compensation at the lower rate of 20%, as opposed to the higher rate associated capital gains.

Obama’s campaign pledge on tax reform was to close this loophole that the Obama administration said would raise $1 trillion over the next 10 years. But Obama was never a reformer and his administration eventually caved to the big donors.

Biden’s recent decision to allow private equity into 401(k) plans only benefits private equity firms that have failed to deliver high returns for many public and corporate pension funds.  Now, they are looking for uninformed investors in a 401(k) plan.

Unfortunately, the Biden administration has opened the flood gates for pillaging uninformed investors of their retirement funds.

Today, 401(k) plans allow crypto and Bitcoin into their funds. Both are pure speculative bets that are in the same asset class as roulette, and are ripe for fraud and pump-and-dump schemes, as these articles show.

Private equity is just another poor investment choice designed to lure naive investors into the flame of high-return, high-risk schemes.

This entire case study again shows that Biden, like Bill Clinton and Obama, is just another corporate Democrat that distains average citizens. This opens to doors for Republicans who do not even make the pretense to protect average investors, to work with their large corporate donors to push ahead with unregulated capitalism at every level of society.

So, what is the bottomline?

Caveat emptor to 401(k) participants. Neither Dems nor Republicans care about your retirement funds.

 

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Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry. He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial. He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site, www.mutualfundreform.com, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).

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