A WARNING To All Investors (NEW Policy Changes)

A warning for everyone investing, Department of Labor just released an update for all 401k investors

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A warning to investors, there are some NEW policy updates we need to talk about that were recently made clear by the Department of Labor and I think you should know about them - especially if you are investing in a 401k

Here is what’s going on - three simple words. Private Equity Funds. For many years, private equity funds have been trying to invade the retirement contribution savings plans that you most likely invest money in.

This is because that amount of money private equity funds will now have access to is worth roughly $6.2 trillion dollars. That is more than the total value of Apple, Amazon, Google, Facebook, Tesla, Alibaba, and Berkshire Hathaway - combined.

Just recently, the department of labor cited an executive order from Mr. Donald Trump to “remove barriers to economic growth.” This phrasing now allows private equity to indirectly participate in your portfolios. The problem is, they’re very misunderstood and no one is really talking about how investing in them is a high risk venture.

First, let's understand what Private Equity is. What it is, is a giant pool of money that is managed by extremely wealthy millionaires and corporations. They use this money to invest in companies and potentially buy them outright. One of the worst practices of what they do is something called "leveraged buy outs". This is when they borrow money, purchase a company, then dump the entire debt on the company they purchased. This forces the newly purchased company to start cutting costs until eventually, the company goes out of business.

There's two major problems with investing this way.

#1 They are considered extremely high cost investments because private equity makes a HUGE amount of money on fees for managing YOUR money. In fact, when they sell a company from their portfolio, they can charge their funds fees over $10 million dollars WITHOUT disclosing that to their investors while they eat away at your returns.

They’re also very difficult to judge in terms of what they are exactly, and if you find out what’s inside your investment and how it’s run because they are not transparent with that information, they are not considered very “liquid” aka - they aren’t easy to sell because they can lock your money in place for 5+ years at a time.

In 2010 the Dodd Frank Act gave regulators more power to investigate private equity. So the Securities Exchange Commission did some digging and they found that 50% of the private equities they looked at, collected fees inappropriately and have violated rules on how they manage money.

#2 The second reason to be careful is that by taking on greater risk, you’d expect a higher performance. But there’s no conclusive evidence that to shows - long term, private equity funds perform any better than traditional investments like mutual funds, indexes, ETFs, or just individual stocks.

People like Warren Buffet are extremely critical of them. In last year’s Berkshire Hathaway meeting with investors, Warren Buffet said "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 to me.”

More than likely, these funds will not be available to invest in directly, instead, they will be hidden inside your target date funds which according to Fidelity, roughly 52% of all Americans that have a 401k actually own (target date funds). In fact, my parents own a target date fund for 2030.

This affects everyone in the beginning and middle phases of their careers with a 401k employer sponsored plan, especially if you invest by purchasing these target funds. Please be careful about what you're buying.

Here are some more resources for further research:
https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020

https://www.wsj.com/articles/sec-finds-high-rate-of-fee-expense-violations-at-private-equity-firms-1399411278

https://www.penews.com/articles/what-access-to-the-6-2tn-401k-pension-market-means-for-private-equity-20200611

Видео A WARNING To All Investors (NEW Policy Changes) канала Andrei Jikh