Today, more than ever in the past, private equity is gaining a strong foothold in pension and 401k plans. In 2019, roughly $3.9 trillion in assets were held by private equity firms, and that was up over 12% from the prior year. Private equity fell off a cliff in 2020, but by year’s end managed to recover due to an ambitious recovery in the second half. Covid created a huge backlog of buyouts and financing in 2020, and the backlog carried over into 2021 along with rapid growth of new offerings. Private equity has ignited a global effort to grow money, and pensions and 401k plans represent a target for funding these sometimes highly speculative and questionable ventures.

It is likely that most 401k investors are clueless as to what private equity actually represents as an investment. The reality is that companies like the Principal Group of Companies have been using 401k funds to invest in private equity for years, without the blessings of banks, the Securities and Exchange Commission, and the Department of Labor. Hard evidence exists to prove that is the case, but because companies like Principal are treated as “too big to fail” companies, the Feds have adopted a “hands off” approach in dealing with the criminality of such companies.

A case in point would be Principal’s relationship with lending agencies during the years leading up to the 2008-2009 financial crash. As money became tighter with the banking system, to protect reserves, banks could only lend to financially secure institutions. Doing so required access by the lenders to funds to repay the loan should the loan recipient defaulted. Principal would offer as collateral the Principal U.S. Property Separate Account (PUSPSA), an $8 billion real estate investment account funded only by 401k plans! The loan documents signed by Principal representatives clearly stated that none of the loan guaranteed funds were generated by retirement funds, yet attached to each loan was a “Loan Purchase Agreement,” stating if the loan defaulted even in as short as two years, the PUSPSA would “repurchase” the loan from the lender, and pay all costs associated with the loan default, including but not limited to accrued interest, default penalties, and even any wraps attached to the loan!

Needless to say, during the 2008 financial crash, virtually every loan that included a Loan Purchase Agreement failed, and the PUSPSA was defunded by freezing the account from withdrawals by 401k plan participants, and instead diverting billions of dollars in cash to lending institutions to pay for Principal’s defaulted loans! When the dust settled and Principal lifted the Withdrawal Restriction, the $8 billion PUSPSA was reduced to approximately $3.5 billion, all within 14 months.

In a June 2020 Information Letter released by the Department of Labor, the DOL affirm that PE investments as a component of a professionally managed multi-asset class vehicle structured as a target date, target risk or balanced fund can be offered as an investment option for participants in 401k defined contribution plans under ERISA. 

By November of the same year, Principal announces a “new pooled employer plan,“ calling it a “novel approach to simplifying plan administration and fiduciary risk for employers.” Included in Principal’s plan was to “bring together the combined strength and expertise of Principal as the Pooled Plan Provider (PPP) and recordkeeper, along with National Benefit Services, LLC (NBS) as the third-party administrator (TPA) and Wilshire^® as the investment fiduciary…. Wilshire brings a long history of investment management experience, developing market-tested strategies and innovative best practices garnered from meeting the needs of large institutional investors.”

Special Purpose Acquisition Company ….

For the reader that is not familiar with the Special Purpose Acquisition Company (SPAC), this link will explain how it works, and why you do not want this type of investment involved in your retirement planning!

In October of 2020, CC Capital, a private equity investment firm owned by Chin Chu, purchased Wilshire. In September, 2020, “Blank Check Vet Chin Chu” recorded this video stating that he “sees no ceiling for SCPA deals.” Later, strategists at Goldman Sachs noted that of the 172 SPACs that had closed a deal since the start of 2020, the median SPAC had underperformed the Russell 3000 index by 42 percentage points! Hardly the kind of investor mentality Principal would want as a fiduciary for their MEP accounts!

In December of 2021, a supplemental statement released by the Department of Labor cautions that private equity investments in participant-directed retirement savings plans may not be appropriate in certain cases. In the Dec. 21 statement from the DOL’s Employee Benefits Security Administration (EBSA), the department advises that except in a minority of situations, plan-level fiduciaries of small, individual account plans are not likely suited to evaluate the use of PE investments in designated investment alternatives (DIAs) in individual account plans.

In 2020, the DOL approved the use of private equity investments in 401k plans, but in 2021, they admitted that most plan-level fiduciaries “of small, individual account plans,” are not likely suited to evaluate the use of such investments!

Now, a year later, December of 2022, the Principal Group of Companies introduces a Multi-Employer Plan (MEP) designed for the small, individual account plan! Sans the Wilshire and “Blank Check Chu,” Principal instead chose HUB to be the Independent 3(38) investment fiduciary. (Next: Vetting Your 401k, (2))