[Part 2] Wall Street Is Gambling with Your 401(k)

Dear reader,

The concern with pushing problems forward, rather than solving them, is that the problem only gets worse. 

For example, when the Enron scandal broke, millions of people got their first glimpse at how big, and personally devastating, this problem can be, especially for older workers who have had their 401(k) wiped out, who know that  Social Security and Medicare are going broke, and who know their kids are not much better off than they are. Instead of retirement being a dream, retirement becomes a nightmare.

A giant stock-market crash is coming, but the market crash is not the problem. Predicting a market crash is not a big deal. All financial markets go up, and all financial markets come down. Market cycles are a part of life. Predicting a market crash is like predicting the coming of winter. 

The issue is that the next market crash will reveal big problems. The next crash will be especially hard because three generations have pushed a bigger problem forward—the problem of how people support themselves once their working days are over. That is an unprecedented problem that grows bigger every day.

The problem with most retirement portfolios is that they are based upon the assumption that markets ultimately move up in the long run. That is why they always say, “Invest for the long term.” To compensate for market volatility—that is, the up, down, and sideways movements of markets—financial planners advise diversification as the solution.

Failed Promises

For years, politicians promised labor leaders and government employees 7.5 to 8 percent returns on their pensions. The problem is, most unions and governments funded their budgets for 5 percent returns. Gains in the stock market were supposed to cover the shortfall. If there was a shortfall, the difference was to be paid for by the taxpayers.

But, politicians lie and make promises they don’t intend to or can’t keep just to get elected.  Pension leaders lie for the same reason: they need to stay in power. Government bureaucrats lie, budgeting less than politicians promise. Why should government bureaucrats tell the truth? Most are in the same pension, as are most of our Congressmen and Senators. 

Union members and government employees don’t care who is lying. All they want is to feel safe in the belief that their pension is safe. Nor do they care if their fellow citizens, the taxpayers they represent, have to pay for their retirement. 

And most taxpayers are sound asleep as they are robbed blind. 

It is easy to understand why retired schoolteachers, police, and firefighters would be lured into hedge funds. Most think that hedge funds follow the same rules as mutual funds.

An Alternative

In recent decades, pensions globally, in hopes of boosting investment returns, have shifted assets away from highly-transparent traditional investments, such as publicly-traded stocks and bonds. And today, many pensions hold a quarter or more of their assets in “alternative” investments such as private equity, venture capital, real estate, and hedge funds. 

To protect your retirement security, you need to pay particularly close attention to your pension’s investments in these risky “alternatives” because these deals are riddled with abusive provisions amounting to a license to steal—from you.  

Pay attention to why public employee pension funds have grown so fast. One of them is promises. Governors and legislatures made pension promises to public employees. The problem: These governors and legislatures did not fund the pensions to match their promises.

Another reason is the gap. The pension board needed to make 7.5 percent returns in the market, to fill the gap. But the problem is that pension boards are made up of teachers, firefighters, and police officers. And as a solution to the gap problem, in the 1980s, Wall Street began selling pension boards high risk “credit assets.” The financially illiterate pension overseers blindly bought up these assets. 

America’s state and local government, pensions’ investments in “alternatives” have more than doubled in recent years from 11 percent to 26 percent, amounting to an estimated $1 trillion. 

State and local pensions gambling on alternative investments that demand high fees and carry the risk of heavy losses is bad enough. These highly complex funds lack virtually all of the hallmarks of prudent, sound investments.

Taxpayers are Getting Screwed

In the United States, the combined value of pension plan assets held by state and local governments in 2018 was over $4 trillion. These pensions are overseen by boards of trustees comprised of laymen and women who generally lack any knowledge or expertise in investment matters.  And as I’ve mentioned public pension boards include some individuals, such as active or retired teachers, cops, firefighters, and sanitation workers, who are supposed to represent the interests of workers and pensioners. Other board members are appointed by politicians, such as governors and mayors, who are supposed to represent the interests of voters, aka taxpayers. 

What could possibly go wrong, you might ask?

Here’s an example from my Co-Author of “Who Stole My Pension”, Ted Siedle: 

With $354 billion in assets under management, the California Public Employees Retirement System, America’s largest state pension, has historically been considered the “gold standard” for public pensions in its investment approach, its integrity, and its management. 

How well is the nation’s “best of the best” American public pension managed?

In 2016, the former chief executive of the pension was sentenced to a prison term of 4.5 years after pleading guilty to a conspiracy charge for taking more than $250,000 in cash and other bribes from his friend and former CalPERS board member Alfred Villalobos. Prosecutors said Villalobos, who killed himself weeks before he was due to stand trial, reportedly made $50 million as a middleman for investment firms looking to get a piece of CalPERS’ business. 

Members of public pension boards and pension staff may be crooked for hustling cash, hookers, and blow, but they’re Boy Scouts compared to the wolves of Wall Street who make billions selling their latest high-cost, high-risk, complex, and opaque deals to unsophisticated public pensions. 

When it comes to stealing from Main Street, no one does it better than Wall Street. 

Tomorrow, we’ll wrap this series up with some insights into the gross malpractice we’ve been living through, and your way out.


Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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Robert Kiyosaki

Robert Kiyosaki, author of bestseller Rich Dad Poor Dad as well as 25 others financial guide books, has spent his career working as a financial educator, entrepreneur, successful investor, real estate mogul, and motivational speaker, all while running the Rich Dad Company.

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