[Part 3] Wall Street Is Gambling with Your 401(k)

Dear reader,

As the media relentlessly focus on the federal government’s burgeoning debt, jobless rates, and the coronavirus, the biggest gamble ever made on 401k just happened. 

The department of Labor’s decision is the result of the private-equity industry’s battle to tap into the $8.9 trillion defined-contribution marketplaces. Advocates for this move say private equity’s inclusion will help retirement savers diversify and generate stronger performance.

In my opinion, fees and 401k costs will skyrocket and leave DC pensioners exposed like never before. And if this thing crashes, as I suspect it will, as Warren Buffett says, “It’s only when the tide goes out that you learn who’s been swimming naked.” 

Public Pensions and Private Equity

If there’s anything to be learned about allowing private equity into 401(k)s it’s that 

Over the last two decades, public pensions have failed to meet their overly optimistic return promises because they allocated assets to the highest-cost, highest risk investment ever devised by Wall Street—hedge and private equity funds. 

Buffett also warned pensions against investing in private equity. “We have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that I would regard as honest,” Buffett said at Berkshire Hathaway Inc.’s annual meeting in May 2019. “If I were running a pension fund, I would be very careful about what was being offered to me.”

What Buffett did not say is that all these liars have done is change the words to sound more PC. In the world of financial pollical correctness, junk bonds have been changed to high-yield bonds. And LBO—Leveraged Buy-Outs—are now referred to as Private Equity.

401ks and Private Equity

In 2014 internal review by the U.S. Securities and Exchange Commission found that more than half of approximately 400 private-equity firms the SEC examined charged unjustified fees and expenses without notifying investors. In other words, America’s premier financial regulator has determined that charging “bogus” fees is commonplace in the private equity industry.

Is this really what the average person with a 401(k) should be exposed to? More fees? More risk? 

When the Department of Labor unveiled their proposal for private equities, Chairman of the U.S. Securities and Exchange Commission and private equity advocate, Jay Clayton commended the Department of Labor’s efforts “to improve investor choice and investor protection” by permitting equity in 401(k)s. 

Of course, in my opinion, Chairman Clayton knows it has nothing to do with choice or protections. 

“The greatest risk with incorporating private equity into 401(k) plans is that savers will be exposed to risks they don’t recognize, understand, or anticipate in funds that they expect to be conservative and stable,” says Barbara Roper, director of investor protection for the Consumer Federation of America.

Gross Malpractice

Over the years, Warren Buffett has had a lot to say about how corporate and government pensions should be prudently managed. If pensions ignore Buffett’s advice, it would have to be because they believe they are smarter than Buffett. Right?  

Well, they’re not.

Tragically, corporate shareholders and public pension stakeholders pay the price when pensions ignore the best advice and choose instead to follow the herd. Management of pension investments globally today can most aptly be described as “gross malpractice generally practiced.”

The people responsible for overseeing a pension are financially uneducated. This is a major problem facing the average 401(k) investor because at the end of the day they’re the ones that will be left with nothing when it goes broke. 

My good friend and CFP, John MacGregor say “People don’t always like brutal honesty, but as a financial advisor for over 25 years, sometimes it’s what they need. I see it so often with my clients: the absolute certainty and assurance they have that nothing can happen to their pension. In fact, most will say, ‘It’s guaranteed and it’s in writing.’ Well, when there’s no money, there’s no money. And I don’t care what that agreement says, if they don’t have it, you won’t get it.” 

Get Educated

Kim and I were recently driving to the airport when the driver was telling us about his parents. He proudly explained how his mother was a teacher and his father was a blue-collar worker, both with great pensions. He boasted about how they are both wonderful, hard-working people, well deserving of their impending benefits.

I proceeded to warn him that a lot of pensions could default leaving their recipients left with nothing. Our driver was adamant, “oh no, no, that can’t be. They cannot be in crisis.”

And for those paying attention, we were not in the United States.

So what does this pension crisis mean to you?

Regardless of whether you have a Defined Benefit or Defined Contribution plan is irrelevant. As I’ve discussed numerous times before, the looting of our individual wealth is well underway and it isn’t going to change anytime soon.

For those of you who want to take greater control over your financial destiny, you may want to go beyond just being a bull or a bear. If you want to be a real-world investor, you may want to develop your financial education, experience, and instincts in order to become a person who can see beyond the ups and downs of any market and always see the brighter future that lies ahead.

In a world where you could potentially be living much longer, it’s vital that instead of spending your entire life working for money, you must instead have your money work for you your entire life. This means moving from the left side of the CASHFLOW® Quadrant, the employee and self-employed side, to the right side, the business and investor side.

This is one of the most fundamental concepts of the Rich Dad philosophy on money. By building businesses or investing in assets that provide passive cash flow month in and month out, you provide the security you need to have a robust retirement.

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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