My Greatest Fear Has Quickly Become Reality

"My greatest fear has quickly become reality."  This was a line my partner and I would ask prospective clients back in the late 80'ss and early 90's, aka the cold calling days. The prospective client would always respond, "what's that?"

If you have not read our blog last month on Benzinga, The Hottest Party on Wall Street is One You Might Not Want an Invite To, you should.

We mentioned in it that Private Credit/Private Market investments are heading for your 401k plan. Well, our greatest fear has now become reality according to a Bloomberg News article published in AdvisorHub on June 26^th titled, BlackRock Puts Private Equity and Credit into 401(k) Funds. The article states that BlackRock's CEO, Larry Fink, a very rich man, vowed earlier this year to unlock private markets for retail investors after his firm plunked down $30 billion on three acquisitions to expand heavily into private-markets data, infrastructure and private credit. Apparently, he is trying to find a way to recoup his $30 billion and fast. I would ask him if I'm right but I'm not sure his private plane has my firm's number in their rolodex.

According to the article, BlackRock plans to create new Target Date funds which will include private credit and private equity along with publicly traded stocks and bonds and possibly other types of assets, after all it's what the people want right?  BlackRock believes this could potentially increase (investors) returns by .5% annually and 15% more over 40 years. I noticed they left out what this means to BlackRock's returns – probably not that important. Also, over 40 years, 15% translates into .375% a year not .5% what happens to the additional .125%, maybe it's for refueling the jet? Not to mention the added risk for what appears to be very little additional benefit.

According to Morningstar, fees for semi-liquid funds can be up to three times higher than traditional stock and bond funds. The average annual expense ratio was 3.16% compared to active mutual and exchange-traded funds of 0.97% according to Morningstar. You don't think this is possibly a reason why BlackRock, Empower, Apollo Global, Neuberger Berman, Franklin Resources, Goldman, JP Morgan and many others are wanting to bring Private Credit to the masses, especially via your 401(k) do you? Maybe this is why Larry Fink in his annual letter to investors said "unlocking private markets" is key. What he left out was "to BlackRock."

Sen. Elizabeth Warren and I rarely see eye to eye on things but in this particular case, her concern with funds expanding into private credit is warranted. She dubbed them a "Wall Street time bomb" and stated, "during a crisis or even momentary panic in the broader markets, private credit is more likely to experience liquidity freezes, inability to perform price discovery on their underlying assets, and lines of credit being terminated as traditional banks flock to safety." Sure sounds like the type of investment you'd want to have in your company's 401(k) retirement plan.

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My firm, LCM Capital Management, has been managing individuals' money for 25 years.  My partner and I have been doing this each for over 37 years and we also advise 401(k) plans. We educate participants when it comes to investing and fees and no matter how educated investors are, in our experience, only rarely do they fully comprehend the risks and all in fees associated with their investments outside our firm, especially with these newest products. One of our firm's mantra's is, "Investors do not buy these products, they are sold to them." Hopefully you now realize why that is. Be careful, keep an eye on new funds being added to your 401(k)/403(b) plans, ask a lot of questions and know that there is a better way.

Benzinga Disclaimer: The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the views of Benzinga. This content is intended for informational purposes only and should not be construed as investment advice. Benzinga does not endorse any investment products or strategies discussed. Readers are encouraged to consult with a licensed financial professional before making any investment decisions.

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