We live in crazy times. Reality TV icon Kim Kardashian has agreed to a $1.26 million settlement with the Securities and Exchange Commission for promoting a cryptocurrency on her Instagram account without disclosing a $250,000 payment from the currency creator to do so.
The SEC is concerned that celebrity endorsements could lead investors into assets that are not compatible with their financial interests.
Meanwhile, in Congress the Retirement Savings Modernization Act was just introduced to allow cryptocurrency and just about anything short of lottery tickets into America’s 401(k) accounts. The alternative asset industry — private equity, hedge funds, venture capital, real estate, and more — has been trying for years to offer their speculative products — and reap huge fees in the process — through personal retirement accounts as they are already able to do in some public pensions, such as Ohio’s.
There has been no legal barrier to these investments, and the Trump administration’s Department of Labor went so far as to specify that alternative investments could be part of 401(k)s, a decision affirmed by the Biden Administration. But companies administering 401(k) accounts are fiduciaries, and they’ve avoided alternative investments in fear of getting sued for breach of fiduciary duty for offering them to workers. For decades, prudence has prevailed and 401(k) retirement accounts have not allowed high-fee, illiquid funds as a 401(k) option.
The proposed bill simply states that alternative investments, despite the higher fees associated with them, are “covered” investments that do not establish fiduciary breach by their presence in a 401(k) plan. The cloak of congressionally created cover for alternative investments is needed because the current commonsense assumption is that the mere presence of these investments is strong evidence fiduciary duty has been breached.
Private equity and hedge funds were the source of $625 million in political spending in 2020. Now they are joined by the cryptocurrency industry that is also pouring tens of millions of dollars into political spending. The good government these contributors want is an open door to the retirement accounts of working Americans.
The lawmakers behind this proposal say they want workers in a defined contribution retirement account like a 401(k) to have the same options that exist in defined benefit plans like Ohio’s public pensions. But Bloomberg reports private equity has taken in $4.9 trillion from investors since 2000 but only distributed $5.1 trillion through 2021. The cash return to investors was 5.3 percent. The fees and expenses collected by fund managers was exponentially more.
It’s not believable that a protective cloak for alternative investments is motivated entirely by concern for enhancing workers’ retirements nest eggs, rather than as a mechanism to enrich fund managers who fuel campaigns. If alternative investments are suitable choices for what for many workers will be their only retirement asset, aside from Social Security, it should not take special legislation and newfound legal protection to accomplish. The fact that employers fear lawsuits to offer this choice to 401(k) managers speaks volumes as to the wisdom of these investments.
First Published October 8, 2022, 4:00 a.m.
