Column: What would private equity funds in 401(k)s mean for retirement savers?


CHICAGO (Reuters) – Employer retirement plans are not known for their flashy investments – a majority of 401(k) investors these days use target date funds that invest in broad, diversified equity and fixed income mutual funds that automatically rebalance to minimize risk as retirement approaches.

FILE PHOTO: U.S. Dollar banknotes are seen in this photo illustration taken February 12, 2018. REUTERS/Jose Luis Gonzalez/Illustration/File Photo

That has been a healthy, if unexciting, trend. But in the years ahead, some plan sponsors may start spicing things up. Last week, the federal government opened the door for plan sponsors to add private equity funds to their 401(k) plans. Private equity funds invest in everything from buyouts of mature non-public companies to firms getting ready to go public – and even venture capital startups. Until now, these investments have been available only to wealthy and institutional investors. 

The private equity industry has been knocking on the 401(k) door for a number of years, and the attraction is not difficult to understand. Defined contribution plans represent a huge pool of investable funds, holding $8.9 trillion in assets at the end of 2019, according to the Investment Company Institute.

Private equity proponents scored a win last week when the U.S. Department of Labor (DoL) issued a guidance letter outlining how private equity could be added to defined contribution plans under existing rules (reut.rs/2BTOymi). The letter could mark a turning point in a broader move to open up private equity investing to less affluent, individual investors. 

In the retail investing world, the U.S. Securities and Exchange Commission is reviewing its rules governing sales of private equity, including liberalization of the rules restricting these investments to “accredited investors” – those with net worth (excluding their primary residence) of $1 million or more, or annual income of at least $200,000 for single filers ($300,000 for joint filers) for the past two years.

Private equity advocates argue that these funds can produce higher returns over time than the stock of publicly held companies, even net of fees. 

“If you think of the stock market as a way for investors to harness the economic power of gross domestic product and capitalizing on that, a growing portion of that activity today is being held by private investors today as opposed to being in the public markets,” said David O’Meara, senior defined contribution strategist at consulting firm Willis Towers Watson.

A SLICE OF THE INVESTMENT PIE 

But the difference in returns among private equity funds can be huge. And unlike active mutual funds, where top performers do not outperform the market consistently over the long term, top private equity funds have greater “persistence,” because top managers get first look at the highest-quality investments, according to Fran Kinniry, global head of private investment at Vanguard. “You need to have confidence that you can pick managers who are in the top third of performance,” he said. 

If private equity does start popping up in workplace plans, it likely will have a slice of the investment pie in target date funds that will not exceed 15%, experts say.

Among the three largest providers of target date funds – Vanguard, Fidelity Investments and T. Rowe Price – none are jumping on the bandwagon yet, although none have ruled it out for the future.

Vanguard, which has long advised foundations and endowments on private equity investments, is now expanding its offerings to high net-worth clients, and next year will begin offering it to clients in its fast-growing Personal Advisor Services who meet the current – or revised – accredited investor standards, Kinniry said.

One challenge for plan sponsors will be how to value private equity on a daily basis. In 401(k) plans, participants are able to check the value of their holdings at any time, but valuations of private equity investments are updated only periodically. 

Meanwhile, the DoL letter lays out some fiduciary hurdles that plan sponsors would have to leap, said Fred Reish, an attorney with Faegre Drinker who specializes in employee benefits. “It says fiduciaries must have the expertise to be able to evaluate these products, or hire advisers or managers who do. And participants must be given information that they can understand and use to decide whether or not to be in that investment.”

Reish thinks those goals can be met by large, sophisticated 401(k) plans. But he does not expect to see private equity turning up in plans overnight, noting employers are a cautious bunch. “They read all the headlines about other plan sponsors being sued for violations of their fiduciary duties, and it scares them to death.”

In recent years, many of those headlines have been generated by attorney Jerome Schlichter, senior partner at Schlichter Bogard & Denton. He has won more than $350 million in 401(k) excessive-fee cases for employees and retirees, and won judgments that required defendants to improve their plans – relief he values at more than $1.5 billion.

“This is fraught with peril both for employees and companies that choose to do this,” Schlichter said. “There’s a reason private equity investments have been limited to wealthy, sophisticated investors. This is grafting a product that wasn’t designed to be in the retirement plan of an average investor into those retirement plans.”

(The opinions expressed here are those of the author, a columnist for Reuters.)

Reporting by Mark Miller in Chicago; Editing by Matthew Lewis



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U.S. money market assets decreased in latest week: iMoneyNet


NEW YORK, June 10 (Reuters) – U.S. money market fund assets decreased by $24.84 billion to $4.668 trillion in the week ended June 9, the Money Fund Report said on Wednesday.

Taxable money market fund assets decreased by $24.31 billion to $4.534 trillion, while tax-free assets decreased by $530.30 million to $133.95 billion, according to the report, published by iMoneyNet.

The iMoneyNet Money Fund Average 7-Day Simple Yield for All Taxable money-market funds was unchanged at 0.08 percent. The Taxable WAM lengthened by one day to 43 days. The iMoneyNet Money Fund Average 7-Day Simple Yield for All Tax-Free and Municipal money-market funds slipped to 0.04 percent from 0.05 percent last week. The Tax-Free WAM remained at 27 days.



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Column: Spend or hoard? Fate of forced savings could define pandemic recovery – Mike Dolan


(The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own)

FILE PHOTO: George Washington is seen with printed medical mask on the one Dollar banknotes in this illustration taken, March 31, 2020. REUTERS/Dado Ruvic/Illustration/File Photo

By Mike Dolan

LONDON (Reuters) – Many households have built up a stash of savings during the coronavirus lockdowns of the past three months — and how they view them may dictate the speed of recovery from the pandemic.

Although the shock has caused spikes in unemployment, most households spent lockdown periods either working from home, furloughed or on direct government income support. And with few goods or services available to buy, their savings have soared.

Whether people see these unexpected cash hoards as a windfall or a buffer against future uncertainties is likely to determine the speed of the recovery, at least this year.

If the public treats the money like a tax rebate, spending could surge, says Paul Donovan, chief economist at UBS’s global wealth management arm. He points to U.S. tax rebates in 2001 and 2008, money from which was fully spent within about two quarters — mostly on durable goods such as furniture and consumer electronics.

As lockdowns lift with no second wave of virus infections so far, pent-up spending could be a big boost to third-quarter consumption — underlining why some investors still believe in a “V-shaped” recovery.

“This involuntary saving could be spent. It will depend on fear and trust,” Donovan said. “Fear of the virus and fear of unemployment need to be low. Trust in government policy needs to be relatively high.

“These are, after all, savings that many people never wanted in the first place — at least as far as saving on entertainment and services is concerned.”

CASH STASH

U.S. Bureau of Economic Analysis data last week showed the personal savings rate almost trebled to a record 33%, or $6.15 trillion, in April — having already doubled to more than $2 trillion in March. In the six months before, the average was nearly $1.3 trillion, or just under 8%.

Directly comparable data for Europe, which locked down earlier, is not yet available, but the European Commission is forecasting that household savings rates will nearly double to 20% this year. Bank of America meanwhile points to a record jump of over 300 billion euros in euro zone private sector deposit inflows in March, although that will include firms building up cash to survive the freeze.

And on Tuesday, Bank of England data showed UK household deposits rose by 30 billion pounds over March and April compared to average monthly increases of 5 billion pounds in the six months prior. There was also record net repayment of consumer credit of 7.4 billion pounds in April alone.

Donovan notes that despite the large aggregate numbers, the distribution is scattered.

For many furloughed workers in Europe, for example, income has been at 80% of normal levels. But spending has probably declined by 20-30% across the major economies.

Some American households may even see a temporary rise in weekly incomes as they claim jobless benefits of $1,000 per week — higher than half of all working wages. They also get a $1,200 one-off government payment.

It is higher income groups that tend to save more, however, as they spend a smaller share of their incomes on food and essentials. Much of that discretionary spending is on services such as travel, restaurants and entertainment that have largely been unavailable during the crisis.

POLICY TWISTS

While major uncertainties remain about the reopening of economies, job security, the trajectory of the virus and a potential vaccine, government and central bank policies will help determine whether this money leaves bank accounts as quickly as it arrived.

Harvard economist Kenneth Rogoff argues that preventing cash hoarding is one reason why the U.S. Federal Reserve should consider adopting negative interest rates — effectively a charge for not spending — as European central banks have done.

Others fear zero and negative deposit rates just lead to a “paradox of thrift”, where people put aside even more to make up for lost returns — further swelling the savings glut.

For governments, the issue may also inform post-pandemic support. With private consumption the main driver of economic activity — as high as 70% of GDP in the United States — Barclays economists say changes in savings patterns could easily offset any new fiscal measures.

They argue that fear of future tax rises to fix public finances could prompt household caution — so-called “Ricardian equivalence”, a phenomenon sketched by 19th century economist David Ricardo suggesting the public’s behaviour in response to government saving or borrowing offsets the impact of policies.

What is clear is that current bloated savings levels mean confidence, or lack of it, could have a snowballing impact in the second half of 2020. Financial markets are already taking that on board.

By Mike Dolan, Twitter: @reutersMikeD; Editing by Catherine Evans



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Column: What COVID-19 is teaching us about how to reform Medicare


CHICAGO (Reuters) – The COVID-19 pandemic has put a bright spotlight on weaknesses in many of the systems designed to protect Americans from risks. But with older people more susceptible to serious illness and death from the virus, the problems in our Medicare system that were evident pre-pandemic have come into especially sharp relief.

FILE PHOTO: Participants hold signs as Democratic U.S. presidential candidate U.S. Sen. Bernie Sanders (I-VT) speaks at a news conference to introduce the “Medicare for All Act of 2019” on Capitol Hill in Washington, U.S., April 10, 2019. REUTERS/Aaron P. Bernstein

Medicare reform will be on the agenda in Washington after the pandemic recedes – if nothing else, the looming exhaustion of the Hospital Insurance trust fund in 2026 must be addressed (reut.rs/2X3JRyf). But there also is growing support for a post-pandemic drive for Medicare for All, or at least to expand Medicare by reducing the current eligibility age of 65 (reut.rs/3gzmcxA). 

With that in mind, this is a good time to consider how Medicare could be improved.

NURSING HOMES

Medicare plays a critical role regulating and funding nursing homes, paying for care in skilled nursing facilities for up to 100 days during each spell of illness. During the COVID-19 crisis, the rules for covering care have been relaxed, but the big headlines have focused on the sky-high infection and death rates in nursing homes.

This is not a new problem. The U.S. Government Accountability Office (GAO) reported recently (bit.ly/2yD2i3y) that 82% of nursing facilities nationwide were cited with infection control deficiencies in one or more years between 2013 and 2017, with 48% cited in multiple years. 

The Centers for Medicare & Medicaid Services (CMS), which runs Medicare, reoriented its inspection practices around infection control in March, but state surveys still are finding compliance problems with hand hygiene, proper use of personal protective equipment and isolating infected patients (bit.ly/3gD0Org).

“This crisis has underscored the incredible need for quality healthcare and good coverage for all citizens, but particularly for people who are older, have disabilities and need longer-term or chronic care,” said Judith Stein, founder and executive director of the Center for Medicare Advocacy (CMA). 

PRIVATIZATION

Medicare is quietly being privatized. Medicare Advantage – the privately offered alternative to traditional Medicare – is on track to cover 47% of all enrollees in 2029, up from 34% this year, according to a Kaiser Family Foundation (KFF) analysis of Congressional Budget Office projections (bit.ly/2TGaXcW). And all prescription drug coverage is offered by private insurers through Medicare-sponsored marketplaces.

Critics question the effectiveness of outsourcing so much of Medicare coverage to commercial insurers (nyti.ms/2zxoU5W). Enrollees must navigate hundreds of plan choices that need to be re-evaluated regularly, yet many have significant, complex healthcare needs, and some have cognitive impairments that make shopping difficult.

In some cases, the playing field for private plans and original Medicare is uneven. For example, Advantage plans must cap an enrollee’s annual out-of-pocket expenses at $6,700, and most have lower caps, averaging $5,059 last year for in-network services, according to KFF. But in original Medicare, you can get out-of-pocket protections only by adding supplemental coverage, often a commercial Medigap plan. And here, there is a major catch. The best time to buy a Medigap plan – and often the only time – is when you first sign up for Medicare.

Medigap plans cannot reject you, or charge a higher premium, because of pre-existing conditions during the six months after you first sign up for Part B (outpatient services). In most states, you can be rejected or charged more after that time.

This limited “guaranteed issue” protection effectively makes an initial decision to pick a Medicare Advantage plan a permanent selection for many enrollees. 

Medicare Advantage is a managed care offering, which means your in-network healthcare provider choices are limited – and that can be a problem when serious healthcare issues arise. Medicare tacitly acknowledged that problem recently when it relaxed network rules for COVID-19 care. 

Meanwhile, 6 million original Medicare enrollees have no supplemental insurance, according to KFF. During the COVID-19 crisis, that means a hospitalization would leave them vulnerable to the standard Part A deductible of $1,408 for each stay, and daily co-payments for stays exceeding 60 days.

EYES, EARS AND MOUTH

Many seniors are surprised to learn that Medicare does not cover routine dental, vision or hearing care – a gap that dates to the initial definition of healthcare coverage that did not include these services. “Since then, we’ve learned otherwise,” said Stein. “Certainly oral health is extremely important systemically, and we’re even learning that untreated hearing loss can increase things like falls and dementia.”

Many Advantage plans offer some level of dental, vision and hearing coverage – although it is important to look carefully at the details of what is included (reut.rs/2XClarF). But leaving “eyes, ears and mouth” uncovered in original Medicare – which still accounts for two-thirds of enrollment – makes no sense. 

PRESCRIPTION DRUG CAP

When Medicare prescription drug insurance was created in 2003, the idea that beneficiaries with very high drug costs should pick up 5% of the tab seemed reasonable – but that was well before specialty drugs were invented that carry price tags in the tens of thousands of dollars. And some specialty-tier drugs are not covered by Part D plans.

It is well past time for an out-of-pocket cap on prescription drug costs.

TELEHEALTH

Before the COVID-19 emergency, Medicare coverage of telehealth services – where providers provide care via a video or phone link-up – was very limited. Coverage has been expanded during the crisis, and the use of telehealth services can play a useful role in Medicare going forward. But we will need to spell out thoughtful policies that ensure equitable use of telehealth. “I’m concerned that the telehealth reforms could be good but a slippery slope if it leads to less care being available for some, and in-person care being available for others,” said Stein.

For more on Medicare reform, check out my podcast interview this week with Judith Stein of the Center for Medicare Advocacy (bit.ly/2X94kla).

(The opinions expressed here are those of the author, a columnist for Reuters.)

Reporting by Mark Miller in Chicago; Editing by Matthew Lewis



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Starboard set to win eight board seats at GCP Applied Technologies-sources


(Reuters) – Hedge fund Starboard Value LP is close to having eight directors elected to the board of GCP Applied Technologies Inc (GCP.N) at the chemical company’s annual meeting, people familiar with the matter said on Wednesday.

While not all votes have been cast before Thursday’s annual meeting and the result could change, preliminary figures indicate Starboard will see its entire slate elected by GCP shareholders, the sources said.

The sources asked not to be identified before an official announcement. GCP and Starboard did not immediately respond to requests for comment.

Bloomberg reported the expected outcome first on Wednesday.

The vote will likely give Starboard control of the board and marks the first time one of the activist investor’s proxy contests has ended in a vote since it made corporate governance history by unseating all 12 directors at Darden Restaurants in 2014.

GCP and Starboard, which owns 9% of the company, have been locked in an increasingly bitter proxy battle since early April when the hedge fund nominated eight candidates, including Peter Feld, Starboard’s director of research, to the board.

GCP currently has nine board members and will expand the size to 10 at the annual meeting on Thursday. GCP ran a slate of 10 director candidates.

Starboard won significant support for its campaign when Standard Industries, Inc and its affiliated entity 40 North Management LLC, which together own 24.4% of GCP’s stock, backed the activist hedge fund.

With Starboard and 40 North controling nearly one third of the vote, it was a tough battle for the company to win.

Reporting by Seva Herbst in Boston; Editing by Tom Brown



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Ackman says hedge fund up 27% year to date, dumped Berkshire


FILE PHOTO: William ‘Bill’ Ackman, CEO and Portfolio Manager of Pershing Square Capital Management, speaks during the Sohn Investment Conference in New York City, U.S., May 8, 2017. REUTERS/Brendan McDermid/File Photo

BOSTON (Reuters) – William Ackman’s hedge fund is boasting double-digit gains at a time many portfolios have sunk along with the economy during the coronavirus pandemic, after the billionaire investor plowed cash into a number of companies he already owned and dumped Warren Buffett’s Berkshire Hathaway among other stocks.

The public and private funds at Pershing Square Capital Management have gained between 22% and 27% this year, handily beating both the Standard & Poor’s 500 index and the average hedge fund which are each off 7% since January, Ackman said.

Ackman, who began worrying about the health and market impact of the pandemic months ago, famously hedged his portfolio with a $27 million bet that turned into a $2.7 billion windfall that he reinvested in the stock market in late March, buying bigger stakes in companies he was already betting on.

“We like what we own and we still think these stocks are cheap,” Ackman told investors on a conference call on Wednesday, adding that his portfolio contains companies whose businesses can withstand unpredictable events with severe consequences.

Positions in Berkshire Hathaway (BRKa.N), Blackstone Group (BX.N) and Park Hotels & Resorts (PK.N) were liquidated because the cash could be used more efficiently elsewhere, he said.

Money was used to buy more stock in Agilent Technologies (A.N), Starbucks (SBUX.O), Restaurant Brands International (QSR.TO), Lowe’s Cos Inc (LOW.N) and Hilton Worldwide Holdings (HLT.N), he said, arguing these large companies have best-in-class technology to weather the pandemic.

This year’s gains come on the heels of last year’s 58.1% return, the single best year since Pershing Square’s founding in 2004, and signal that Ackman is still having success with his back-to-basics strategy where in 2018, he took back control of making investments instead of being the firm’s chief marketer.

Ackman was early in closing down his Manhattan office and sending staff to work from home. When millions of other Americans were told to stay away from the office, Ackman pounced on the beaten-down stock of Lowe’s, arguing that the time for long-delayed home improvement projects is now.

“We bought Lowe’s at $84 a share and it was the bargain of a lifetime,” he said with the stock now at $127.62.

Reporting by Svea Herbst-Bayliss; Editing by Chizu Nomiyama



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U.S. bank regulator finalizes new community lending rule


FILE PHOTO: The New York Stock Exchange (NYSE) is seen in the financial district of lower Manhattan during the outbreak of the coronavirus disease (COVID-19) in New York City, U.S., April 26, 2020. REUTERS/Jeenah Moon

WASHINGTON (Reuters) – A U.S. banking regulator announced on Wednesday it had finalized work on a long-running effort to change community lending standards for banks.

The new rule from the Office of the Comptroller of the Currency (OCC) is an update to requirements stemming from the 1977 Community Reinvestment Act, which requires banks to support lower-income borrowers and their communities, and for regulators to grade them on that effort.

The new rule, which does not take full effect until 2024, was a top priority for the OCC’s chief, Joseph Otting. A former bank executive, Otting came to the job vowing to overhaul the rules, which were last updated in 1995. Multiple media reports said that Otting plans to soon step down from the post where he has served since 2017. An OCC spokesman declined to comment on the matter.

However, the overall fate of the rule is unclear. The OCC is one of three regulators responsible for enforcing the rule, alongside the Federal Deposit Insurance Corporation and Federal Reserve. Neither regulator joined the OCC in adopting the new rules on Wednesday, and the U.S. central bank has yet to even propose any changes.

Regulators with joint responsibility over a set of rules typically strive to adopt a consistent standard. But banks now will be split in terms of rules they must follow, depending on which regulator is in charge of overseeing them directly.

FDIC Chairman Jelena McWilliams said the agency was not prepared to similarly complete its rule rewrite, adding that smaller banks were already facing a “Herculean effort” in helping businesses weather a global pandemic.

The new rule from the OCC is aimed at clarifying for banks what sorts of activities qualify for credit under the rule, and updating qualifying activities to better reflect how banks do business currently, after the industry complained for years the grading process was opaque.

Reporting by Pete Schroeder; Editing by Andrew Heavens and Paul Simao



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Retirement services provider Human Interest extends funding round to $50 million


(Reuters) – Human Interest, which helps small and medium-sized businesses set up 401K plans for employees, said on Wednesday it had extended its Series C funding round to $50 million due to more demand during the coronavirus crisis.

The San Francisco-based startup said the additional funding of $10 million was led by investment firm Glynn Capital, bringing the total funding till date to $81.7 million.

“In the past two months, we’ve continued to add customers and grow assets, which is part of what prompted us to raise the additional capital. We are seeing some of the strongest sales months in the company’s history,” Chief Executive Officer Jeff Schneble said in a statement.

The company, which was founded in 2015, had raised $40 million in Series C funding round led by financial services firm Oberndorf Enterprises LLC in March.

Human Interest would utilise the new capital to accelerate hiring across the board, with a focus on engineering, sales and marketing, the company said.

Reporting by Akanksha Rana in Bengaluru; Editing by Rashmi Aich



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Northern Trust shutting fund; an outlier or sign of future risk?


FILE PHOTO: An employee walks past a company logo at Northern Trust offices in London, Britain August 1, 2019. REUTERS/Toby Melville

BOSTON (Reuters) – Northern Trust Corp’s decision to liquidate a $1.8-billion prime money market fund was seen as an outlier event by industry analysts on Wednesday, but one that could portend more problems depending on how the economy fares.

Money has rushed back into prime funds since the sector suffered major withdrawals in March, according to figures from researcher Peter Crane. Total prime fund assets stand at $1.1 trillion, with less than $1 billion of net customer withdrawals for the year to date.

One fund that has not seemed to benefit from the comeback is Northern Trust’s (NTRS.O) Prime Obligations Fund (NPAXX.O) which recently had close to $4 billion in assets.

In filings on Monday, the company said its fund board determined to liquidate and terminate Prime Obligations around July 10, and return money to shareholders, with the action being in their “best interests.”

The fund’s manager in March had disclosed its liquidity level dipped temporarily.[nL1N2BG19H] Asked about the liquidation, Northern Trust spokesman Doug Holt said “this decision was specific” to the fund.

Prime funds own a range of government, bank and commercial instruments. Other firms have injected cash into their prime funds or closed them to new investors, and the sector has received Federal Reserve support. [nFWN2C414W]

Crane said Northern Trust’s actions seem unique given the fund’s small scale and the broader industry comeback. A bigger issue could be low interest rates that lead firms to waive fees, he said.

Analyst Brian Reynolds of Reynolds Strategy LLC said more funds could liquidate if efforts to stimulate the economy don’t succeed.

“The risk over the rest of the year is that more funds start to see redemptions as clients burn through cash that they just borrowed,” he said.

Reporting by Ross Kerber in Boston; Editing by Megan Davies, Andrea Ricci and Nick Zieminski



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