Thursday, July 27, 2023

Edward Siedle warns us why pensions and 401ks should stay away from private equity

16 Reasons Pensions, 401ks Should Stay the Hell Away From Private Equity 

Gambling retirement savings in private equity is a risk you can't afford to take.
In 2020, the Department of Labor pushed corporations to include the highest cost, highest risk, most secretive “private equity” investments ever devised by Wall Street in the 401k retirement plans they offer to America’s workers.
Then-Chairman of the Securities and Exchange Commission Jay Clayton claimed including private equity in 401ks would allow workers to choose “professionally managed funds that more closely match the… asset allocation strategies pursued by many well-managed pension funds.”
Both the DOL and SEC neglected, in 2020, to warn 401k plan sponsors and workers about the massive dangers related to gambling on private equity.
If you are a corporation that sponsors a 401k retirement plan for your employees or a worker who participates in a 401k, below is a preliminary list of just a few of the myriad dangers you should be aware of—risks which, contrary to then-SEC Chairman Jay Clayton’s naïve comments about “well-managed pensions”—not even the most sophisticated pensions fully understand.
This list is derived from several very public forensic investigations my firm has undertaken involving over $100 billion in pensions—funds in Ohio, Rhode Island, North Carolina and New York that lost big gambling in private equity, blithely unaware of the risks. Again, this list of 16 risks is incomplete—a starter kit for would-be private equity investors.
1.  High-risk, speculative investments. Private equity offering documents generally prominently state (in capital, bold letters) that an investment in a private equity fund is speculative, involves a high degree of risk, and is suitable only for persons who are willing and able to assume the risk of losing their entire investment.
If you’re comfortable gambling your retirement savings and losing it all, then proceed onto risk #2.
Are you comfortable gambling your retirement savings and possibly losing it all?
2. High-cost, involving myriad opaque asset-based, performance and other fees and expenses. Private equity investments charge myriad opaque fees and expenses exponentially (10x) greater than traditional stock and bond funds. You’ll never know for sure the total cost of investing in these funds because disclosure of fees and expenses is generally incomplete.
My investigations often reveal annual fees in excess of 6% for large institutional investors. 401ks will pay even more.
3. Illiquid, lacking a public market. Private equity investments generally do not permit redemptions during the life (generally 10-13 years, but may be as long as 50 years) of these investments. The partnership interests offered are illiquid. No public market for the partnership interests exists and none will be developed. You won’t be able to redeem or sell.
4. Lack of transparency. These investments utterly lack a hallmark of prudence—transparency. The information they provide to 401k fiduciaries and other investors is limited, often incomplete and impossible to verify.
If you’re good with putting your retirement savings in a “black box” investment, then proceed by all means.
Are you good with putting your retirement savings in a secretive “black box” investment?
5. Largely “unconstrained” and may change investment strategies at any time. Private equity funds generally disclose specific risks related to investment strategies they may pursue. However, the managers reserve the right to pursue virtually any investment strategy—at any given time. Thus, it is impossible for investors to know for certain at any given time the composition of a fund’s portfolio, the appropriateness of the investments and the related risks.
Are you comfortable investing in potentially usurious payday loans to the poor and controversial life settlements purchased from the elderly terminally ill? If so, proceed to #6.
Are you comfortable investing in potentially usurious payday loans to the poor and controversial life settlements purchased from the elderly terminally ill?
6. Use of leverage. Private equity funds generally reserve the right to engage in borrowing, or leverage, on a moderate or unlimited basis. Leverage increases dramatically the risks related to investing in a fund and the degree of leverage may change at any time.
You have no control over and will never know the degree of leverage employed at any given time. That’s why you could lose everything.
7. No assurance of diversification. Since funds generally reserve the right to invest 100 percent of their assets in a given sector or investment, such as cash, there is no assurance of diversification. How does 100% invested in a single sector, 100% levered sound? Dicey?
8. Lack of comprehensive regulation in the U.S. Private equity  funds are not subject to the same degree of regulation as mutual funds and other U.S. registered funds.
9. Heightened offshore legal, regulatory, operational and custody risk. Many private equity funds are organized and operate in offshore tax havens, such as in the Cayman Islands, which lack the legal, regulatory and operational safeguards offered in the U.S. Also, fund assets may be held, or custodied, offshore. Funds which are incorporated and regulated under the laws of foreign countries present additional, unique risks which 401k fiduciaries and investors should consider. Any problem with having your retirement savings held offshore in the Caymans?
10. Myriad conflicts of interest, self-dealing practices. Private equity funds generally disclose myriad conflicts of interest involving the investment managers to the funds and others. For example, the investment manager determines the value of the securities held by the fund. Such valuation affects both reported fund performance as well as the calculation of the management fee and any performance fee payable to the manager. The investment managers are subject to a conflict of interest because they can profit from inflating values. In the industry, it’s called “mark-to-make-believe.” Further, the performance fee structure creates an incentive to the investment manager to engage in speculative investments and thus is a potential conflict with the interests of the investors.
Mark-to-make-believe: When private equity managers unilaterally determine the value of their portfolio holdings to inflate fees and performance.
11. Business practices that may violate ERISA. Private equity fund offering documents often disclose that investors agree to permit managers to withhold complete and timely disclosure of material information regarding assets in their funds. Further, the fund may have agreed to permit the investment manager to retain absolute discretion to provide certain mystery investors with greater information and the managers are not required to disclose such arrangements. As a result, the fund you invest in is at risk that other unknown investors are profiting at its expense—stealing from you. Finally, the offering documents often warn that the nondisclosure policies may violate applicable laws. That is, certain practices in which the fund’s managers engage may be acceptable to high net worth individuals (or unknown to them) but violate laws applicable to ERISA plans. Comfy with violations of law in your 401k? Can you ever really be sure your 401k is in compliance with the law when the private equity managers disclose they may not be? Why would the DOL and SEC recommend investments that disclose they may violate the laws of the land?
Why would the DOL and SEC recommend investments that disclose they may violate the laws of the land?
12. SEC finds pervasive private equity bogus fees and illegalities. A majority of private-equity firms inflate fees and expenses charged to companies in which they hold stakes, according to a 2014 internal review by the SEC, raising the prospect of a wave of sanctions against managers by the agency. More than half of about 400 private-equity firms that SEC staff examined charged unjustified fees and expenses without notifying investors.
13. Private equity transaction fees securities law violations. Transaction fees charged by private equity funds, sometimes called the “crack cocaine of the private equity industry” because the fees are not traditionally subject to minimum performance requirements, are increasingly opposed by public pensions and have recently been the subject of an SEC whistleblower complaint filed by a senior private equity insider. The SEC whistleblower credibly alleged that private equity firms have been violating securities laws by charging transaction fees without first registering as broker-dealers with the SEC. If the private equity firms included in your 401k have been violating the state and federal securities laws, they may be required by the states and the SEC to refund to investors the transaction fees wrongfully charged.
14. Private equity monitoring fees tax law violations. With respect to private equity so-called monitoring fees paid by private equity owned portfolio companies, whistleblower claims have been filed with the Internal Revenue Service alleging that these fees are being improperly characterized as tax-deductible business expenses (as opposed to dividends, which are not deductible), costing the federal government hundreds of millions of dollars annually in missed tax revenue.
15. Private equity management fee waivers tax law violations. The IRS has in recent years been examining the propriety of private equity management fees waivers, which have allowed many fund executives to reduce their taxes by converting ordinary fee income into capital gains taxed at substantially lower rates, costing the federal government billions of dollars annually in missed tax revenue. Why would the SEC and DOL recommend investments to 401ks managed by tax dodgers?
16. Private equity under-reporting of massive fees. According to a recent New York Times article, the rates of return and hidden costs related to private equity are difficult for even investors in these deals to identify. While certain fees associated with private equity funds are widely known — managers typically charge investors 1 to 2 percent of assets and 20 percent of portfolio gains — other charges, including transaction fees, legal costs, taxes, monitoring or oversight fees, and other expenses charged to the portfolio companies held in a fund are less visible—including unauthorized or bogus fees.
According to a 2015 report by CEM Benchmarking, a consulting firm that offers pension fund performance analysis, more than half of private equity costs charged to pension funds is not being disclosed.
CEM concluded that the difference between what funds reported as expenses and what they actually charged investors averaged at least two percentage points a year. That is, estimated total direct limited partner costs amounted to 3.82 percent. CEM acknowledged this estimate is probably low. A 2007 academic paper found that the average private equity buyout fund charged more than 7 percent in fees each year.
In my forensic investigations of over $1 trillion in retirement plans, I have never encountered a pension that fully understood the dangers of investing in private equity.
For the DOL and SEC to suggest that 401k sponsors and workers will prosper—even recover their COVID-19 losses—through gambling on the highest cost, highest risk, most secretive investments ever devised by Wall Street is ludicrous. It’s a big win for Wall Street and a huge loss for retirement savers.
To learn more about protecting your retirement savings, see Who Stole My Pension? 
Read more here.
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Wednesday, July 26, 2023

Bill Neville peppered with tough questions at his meeting with an angry crowd of educators in Toledo 7/25/23


Area educators sound off on Ohio teacher retirement fund

Toledo Blade
JUL 25, 2023
Visiting leadership from the State Teachers Retirement System of Ohio was met by an irate crowd of Toledo-area educators on Tuesday who accused them of wasteful spending and poorly handling the investments of its members.
Bill Neville, the retirement system’s executive director, stood before more than 100 current and retired educators who packed into Maumee branch of the Toledo Lucas County Public Library where they peppered him with questions about retirement investments, benefits, expenses, and potential cost-of-living-adjustments for members.
“That’s why we’re here, to answer those tough questions and listen to these concerns,” Mr. Neville said after the meeting.
Those attending were asked at the start of the roughly 2½-hour meeting to “be nice but firm” in their inquiries about the retirement system. But not long into the meeting, educators accused Mr. Neville and other retirement system representatives of dodging their questions and denounced past spending practices by system officials and the system’s board.
At issue was retirement system’s decision to pay performance incentive bonuses totaling more than $11 million to investment staff. 
Attendees argued they’d seen little return on investments and hadn’t received cost-of-living increases for years until recently — a 3 percent one-time increase approved in March and another 1 percent increase that went into effect in July.
Those raises for employees come at a time when a special audit by state Auditor Keith Faber’s office showed a low cost S&P 500 index would have returned $90 billion more since 2009 than the system’s current investment strategy.
Jerry Mocek, a retired Toledo Public Schools teacher, was one of many teachers who repeatedly pushed Mr. Neville for details on specific plans to cut expenses. At one point, he asked whether there was support to cut staffing and salaries, as well as whether members would receive much-needed cost-of-living-adjustments.
Mr. Neville would not promise to cut expenses. As to cost-of-living-adjustments, he said he and board members would be seeking potential increases, but couldn’t promise them.
“He never answered the question on how they’re going to cut expenses,never answered,” Mr. Mocek said after the meeting. “It just really angered me that we’re trusting these people with however much money they say they have and they don’t know what they’re doing, and that’s what scares me.”
As attendees became more dissatisfied, they also challenged Mr. Neville about the retirement system board’s February split no-confidence vote in his leadership and Gov. Mike DeWine’s removal of board member Wade Steen, topics on which Mr. Neville declined to comment.
As to other concerns, Mr. Neville said at most about 72 percent of the retirement system’s benefits in some years come from investment earnings,not from contributions and added that financial conditions have improved throughout the past decade.
He added that Mr. Faber’s audit also found that the retirement system has outperformed a majority of similar pension systems and that there was “no evidence of fraud, illegal acts, or data manipulation.”
But attendees remained skeptical and again pushed back at Mr. Neville when he discussed plans going forward to improve financial conditions for the retirement system by seeking more funding from the state —particularly by raising schools’ contribution to the pension from 14 percent of salary to 18 percent.
Crowd members said they doubted that was an attainable or sustainable plan going forward. They added smaller school districts would struggle and questioned how that additional funding would equate to increased benefits or payouts for members, receiving few specific answers.
Read the rest of the article here.

Tuesday, July 25, 2023

Bill Neville's faceoff in Toledo with STRS stakeholders 7.25.2023

Full house and standing room only at the Maumee Library July 25, 2023

Some comments following the 7.25.2023 Neville talk at the Maumee Library, Toledo, OH


This post is likely to get longer in the next few days. I will be adding newer comments at the bottom of this post. KBB

STRS seems to have a problem trying to figure out what it means to have a base salary distributed bi-weekly. Here is a simple solution. Pay the employees twice a month on the 1st and the 15th. Twenty-four pay periods evenly divided into their base salaries. No more "extra pay checks". If Dale Price wants to give them a little extra, fine. He can write them a check from his own personal account.

Neville claims it's common practice all employees on bi-weekly checks get a 27th check.. he's so out of touch. Dale Price supported this check by stating they are get bi-weekly checks, they aren't salary. When I asked what that bi-weekly check was based on.... following up with Hours worked? His reply, "I don't know, I don't work in the payroll dept." Time for Neville and Price to go!!

It really is pretty simple. You have an ANNUAL salary that is divided between the number of paydays for the year!

Neville is delusional if he actually believes that. A salaried employee is entitled only to the amount that they are contracted to earn in a given year. If Neville is that ******* negligent and that ******* stupid, he needs to be fired for cause.

Sounds like 27th check has been “common practice” at STRS for quite some time. It just got exposed this year because of the timing when many of us had to wait 3 weeks for a paycheck - with no additional money above our regular annual salary.

They sure seem to claim ignorance a lot...or maybe it really is ignorance!

It is amazing how hard STRS tries to justify the mismanagement. Bottom line: actives work longer and pay more in contributions than any other retirement. Do not get social security. Retirees do not have inflation protection. Until STRS grants the membership what STRS set for them at the time they started their career and retired, everything else they say means nothing. The sad part is everyone ( STRS, the board, politicians and OEA) knows Ohio educators have been treated unfairly, they continue to try and justify their actions.

I taught for 35 years and NEVER got a 27th check.

Duh- not sounding smart, are they?

I think what he means is that in some years there are 27 Friday paydays in the calendar year.

True. It happens every 7 years. When it does, those of us who have their salaries divided evenly into 26 bi-weekly checks have one month in which we have to wait 3 weeks instead of getting our next check in 2 weeks resulting in receiving 27 check that year.That happened this year.

Dale Price is aware of how this works given he just had this happen. He works for the same school district I do.

So hourly employees get extravagant benefits and bonuses? Why are their salaries listed on documents? And these two mathematical geniuses don't know the difference between salary and hourly wages?

But, as a Board member, wouldn't it be exactly Dale Price's job TO know that, especially if it was a controversial issue (on which HE voted)? I don't think I can be astounded any more by what the non-reform Board members say, and then I hear something like this!

I am so thankful for the groups because facts were presented and Billy boy had no answers. Before this meeting I thought Billy boy and Dale Price didn’t know what they were doing. Now I am sure Billy boy and Dale don’t have a clue. There is no plan to cut expenses on STRS side. Billy was asked many times and told that his advisors said that expenses needed to be cut but I guess he was asleep during that presentation at two board meeting because there was no response other than raising the contribution from the state government or local districts. A comment was made that this money would only go to padding STRS pockets, not to retirees. Again no comment. Billy didn’t know that he was paying two communication directors over 400,000 dollars. When asked why he hired the guy for over 190,000 he again could not answer. The communications department alone costs us over 1 million dollars.

Price was adamant they weren't salaried employees, but when pressed what the bi-weekly check was based on he played stupid! When pressed whether it was based on hours worked, he played serious stupid again.

There were several people he didn't want to answer. Just [glossed] over OR went on to another question. Or tried to…

In a way it was like watching a stand up comedian…the guy with the microphone gets to choose who he answers and who he does not.

I think he thought he'd show up, go over his PowerPoint, and say, "any questions?" We'd all clap and tell him what a great job they've done and ask softball questions about retirement options, insurance benefits, etc, etc. We're getting more informed and educated about the way they waste and/or mismanage our money. They can't run roughshod over us anymore.

We ended up going to a 2 paydays per month cycle instead of every other week to avoid that issue.

Us too. So much easier and simple to calculate

So did our district after people were upset about the three week pay period one year. It’s not hard, even for a history teacher to figure out!

Neville confirmed that as of 12/31/23, the child care will cease to exist at STRS.

Dale needs to step down from his TFT duties as well…poor representation!

They would have told you if the salary was evenly divided in 27 checks. No answer is basically saying, "we aren't going to admit that we paid them extra". Of course they gave them an extra check.

If they get paid every two weeks and are hourly employees why did they need an extra check. Everything should have worked out without needing the approval for an extra check. It just shows you how competent Dale Price is. Oh he is a math teacher by the way.

There were several grills lit up in that room. I'm surprised the fire alarm didn't go off ?? Did you notice many times when Neville answered people on the left/right he walked away from the person who posed the question... with his back to that person. He kept trying to get through his PowerPoint and the masses wouldn't let him.

...gaslighting at its finest.

The only reason every one of us is talking about alternatives to a 27th check is that none of us have ever gotten one! But according to STRS it is common practice...then why do we all, retired and active, not get a 27th check?

Larry KehresMount Union Collge
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