The Wall Street Journal has published a series of cautionary articles in the past few months since 401(k)s will now be allowed to invest in private equity and other alternative investments. I’m glad the WSJ is publishing these warnings although only a relatively few investors will read them.
How One Big Private-Equity Fund Makes Its Numbers Incomprehensible
Tricks of the trade gain new importance as 401(k) accounts open up to alternative investments
By Jonathan Weil, The Wall Street Journal, 8/13/2025
…
While private equity is synonymous with opacity, the tricks of the trade are taking on greater importance as the industry seeks to broaden its reach among ordinary investors. President Trump last week signed an order seeking to open up Americans’ 401(k) retirement accounts to private equity and other alternative investments….
Among the hottest flashpoints: Some funds have exploited an accounting loophole by buying stakes in other private-equity funds at big discounts on the secondary market and then marking them up immediately to their official net asset values. Sometimes the technique has resulted in gains of 1,000% or more in a single day….
Partners Group Private Equity (Master Fund), which last reported almost $16 billion of net assets, is the largest SEC-registered private-equity fund, according to Interval Fund Tracker. Individuals investing in the fund must meet certain minimum financial criteria. To exit from the fund, investors submit redemption requests during designated tender periods. [The investments are illiquid and there’s no guarantee whether or how much can be redeemed. This was explained in a previous article. - W]
There is no way someone reading the annual report could determine which cost figure applied to which investment—and no way to gauge which investments might have fishy markups…. [end quote]
Here’s a screenshot of a footnote from the annual report supposedly showing how much each private-equity holding originally cost and compare that with its latest carrying value. This is obviously meant to make it virtually impossible to figure out. And this is only part of it.
Since the 401k options offered to Proles are very limited, and sometimes, selected based on the kickback received by the “JC”, the Proles can’t do anything with this information, even if they know it.
Only if management gives the Proles that option, in their 401k “plan”. Some years ago, I posted about the Proles of Honda of America complaining about the 401k. The fund options offered were all from the company that “managed” the 401k for Honda, so the manager was stuffing money in his pockets with both hands: fees charged for running the 401k, and the fees charged by the funds. The funds were all high load/low performance, and the Proles had no other choice. The Proles sued, and lost.
The scenario at Honda was made possible by Congress and the POTUS enacting the 401k. Under the traditional company paid, defined benefit, pension plan, the “JCs” were accountable for the Prole’s pensions being there. Under defined contribution plans, like a 401k, the “JCs” are not “burdened” with accountability for the Proles ever seeing a nickle of the money they paid in. This situation received some attention when Enron went BK, as Enron employees had been pressured to put all of their 401k money into Enron stock, and their years/decades of savings went “poof”. In the broader case, Prole’s retirement savings don’t vanish entirely, but their savings are far less than they could have been, because the “JCs” and the fund managers are free to skim from the plan, with no accountability for the Prole having anything to retire on.
This is only a failure of “democracy” in that the “democracy” gave the “JCs” what they wanted.
Ah, finally found something on the Honda case. When reading, recall Honda Motor is the defendant. The court held that the sort of self-dealing that the plan manager, Merrill Lynch, did, is not a breech of fiduciary duty, nor does fiduciary duty require diversity of options for the Proles.
The court questions whether the Honda Defendants' choice to restrict investments to certain Merrill Lynch funds falls within their fiduciary duties. Even if it does, the court concludes that, assuming the plaintiffs’ allegations are true, no fiduciary breach has been established. The Plan includes 24 investment options, with 9 being Merrill Lynch-related funds, resulting in 52% of the Plan's assets in those funds. The court concludes that ERISA does not prohibit this investment structure or require diverse investment options,
