The 401K Trap: Are You Getting SCAMMED?

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Private equity in 401Ks. Yep, President Trump expected to sign an executive order designed to help private equity, private market investments, trying to make them more available to the masses, available to retirement plans. The order would instruct the Labor Department, the Securities and Exchange Commission to provide guidance.

to employers and plan administrators on including investments like private assets and 401k plans. Okay. What could possibly go wrong here? no. All right. You know, it’s funny, I do this thing with my interns over the summer. We do movie night. Yeah, we do movie night. And I…

I have the kids over, I barbecue for them and we watch a financial movie. And the first one we watched was going back to 2000, watched the movie Boiler Room. It was an independent film and it was really good. It had great, great actors and it was a great story. And I much prefer it to the old Wolf on Wall Street because in the movie, actually, know, Wolf on Wall Street was all a

you know, about decadence and the actions of Jordan Belfort. In this movie, it actually showed the people and how they got hurt and the damage that was done by all of these boiler room operations. Now, I’ve got a lot of experience with Connors. We started Markowski Investments, started Markowski Investments that our original plan to bring in business to Markowski Investments was to help

out the people that were ripped off by the wolves on Wall Street, the boiler room operators. We had an account repair kit, and we were contacting them and looking and teaching them to help them to rebuild their accounts. So we’ve seen quite a lot of a lot of pain that people have taken by, you know, people that quite frankly, ethical bypass at birth on Wall Street, been dealing with them.

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my entire career. This radio show, Watchdog on Wall Street. We originally spent, it was only an hour long when we first started. That’s primarily all I did was just go after cons and frauds and trying to alert people to the crooks that were out there. And as I progressed through the industry, I kind of learned that the same thing.

The same thing that the boiler room operators were pulling, it’s the same thing the big firms are pulling. It’s the same things right now that many, but not all, a lot of the private equity and venture capitalists are doing. I’ve often described it here as demonic musical chairs. I was talking about this, again, with my interns, I try to teach them as best I can, as when you’re kids.

I remember my birthday parties, whatnot. My dad there at the record player and we’re trying to eyeball him out of the corner of our eye. We’re going around the chairs and what is he going to pick the needle up off the record and everybody’s got to find a seat. If you’re left standing up, you’re out. Well, Wall Street’s game of demonic musical chairs. It’s who gets who’s left holding a bag, who’s holding the bag last.

once described by Christopher Byron as the greater fools. Who is going to be the greatest fool? And I’ve watched this game being played throughout my career and in many different ways, shapes, manners, forms. Demonic musical chairs was played during the dot com run up, not.

not to the level that I think we’re seeing quite frankly today with the big firms. Again, I do think a lot of people were just overly excited. But again, we had the receipts, we saw. We saw the stock analysts at the major brokerage firms calling companies pieces of you know what, making fun of them, and then turning around and putting buy recommendations on them. Why? Why would they do such a thing? Why would they ruin their reputation? Well, it’s quite fair, it’s not about them.

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It’s not about them. It’s about them selling, doing their job, moving a product, getting it off their books. Companies are layered. We want to go back to the 1990s. And this is prior to a lot of the venture capital and private equity. Companies would go public much, much quicker. They would have maybe a private placement first, bridge financing, and there’d be insiders there. Insiders would get in there.

then the company would go public and the bridge finances could get out, private equity could get out over a period of time. Today the game is played a little bit differently. Companies don’t go public so quickly. They are layered up with multiple, multiple, multiple rounds of financing over the years and they’re held by private equity firms. Now, if you are a private equity firm,

You’re kind of the king, aren’t you? To some degree. You get to basically determine what everything is worth in your portfolio. It’s not public, right? There’s no public market for the companies that they’re holding onto. It’s private. Who pays their accountants? They pay their accountants. And again, want to, know, accountants want to keep their business, they’re gonna…

you know, put a nice valuation, nice high valuation on these things. So their portfolio looks awesome. Looks fantastic. Wow. This company is valued at this. Again, I see it all the time. I see small businesses, blue collar businesses like HVAC companies getting bought out at ridiculous multiples. Do these companies have

Are they positive cash flow? Are they making money? Yes. Yes, they are. But they’re bought out at multiples, which are patently absurd. And again, the private wealth, we bought it for this, it must be worth this. Is it really? So they can hold on to this company in their portfolio. Oh, look at the positive cash flow that it’s bringing in again. And they can charge the people that have invested in their private equity company based upon the valuation that they place on those assets.

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And that valuation quite frankly tends to be very, high. Now, these are the types of investments that you think should be going into 401k plans. Do you honestly think that this is a good idea? I know they’re gonna say, well, you know, it’s got a long time to, you can get out and it can hold on to these private things. And then, you know, then they’ll go public later on.

Some will, without a doubt. I’m not arguing that point. I’m not arguing that some of these things are gonna work out great. I’m just telling you, most of them are not.

Most of them are not. I see what they’re paying right now. And this is, again, I’m coming from personal experience and I’ve talked about this here on the show. The offers that I get to buy Markowski Investments and what we have built here are ridiculous, I don’t know it’s absolutely ridiculous.

Absolutely ridiculous. Now, if I had a nice house, a nice house and a nice neighborhood and you know, let’s say the house, the house was worth, let’s say $500,000. Okay. And some guy for whatever reason came in, I’m selling the house for $500,000 and some guy comes in as I want

I want that house. I don’t care. I love it. I want it. I know, whatever it may be, I’m going to pay $5 million for it. What? Really? Okay. Okay, fine. I’m not hurting the guy. He wants the house. He loves the house. He wants to live in the house. It’s different when you have a business like I do where we are professions. We’re fiduciaries. We have to put our clients interests above our own. I know.

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I know what’s going to happen. sure I could sell my business for an absolutely ridiculous multiple. Live on a yacht the rest of my life. No. No, because I know ultimately it’s going to hurt my clients because there’s no way they’re going to make out on this. There’s no possible way. OK, I know our industry. I know the multiples. I know how it works. However,

private equity company is going say, okay, this look at this company and look at the assets that it manages all this stuff, we are going to put evaluation at 10 times, 10 times earnings. mind you, mind you, it’s usually three. It’s usually three. I know that people are going to get hurt and I’m not going to do that. Again, many are at this point in time. Let’s circle back.

circle back to the 401ks. Great, great piece on this. I want to share a little bit with you. This is about rerouting a tidal wave of captive capital. Why is it 401 is captive capital? Well, you can’t get out of you know, you can’t sell your 401k can’t sell your 401k all that stuff into you.

tire unless you want to pay a significant penalty. That’s conversation with my son last night. He’s just taking a look at a salary and he’s calculating how much money he’s going to be putting into his Roth IRA and I’m like, Whoa, whoa, you’ve been doing great with that. But chill. said, What is your next major purchase is probably going to be a house, right? So you don’t want to go too nuts with that. But anyway, neither here nor there. Okay.

Trillions of dollars are in these 401ks. Private markets are illiquid, illiquid. They are more often than not, like I said, 98 % of the ones that we look at are ridiculously overvalued and they need more money. They need more money. They need more money because they wanna get out. They wanna keep the, it’s in essence, it’s a bit of a Ponzi scheme, okay?

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Bit of a Ponzi scheme. They want to get some of their earlier investors out. How did they do that? What have they got to find? The greater fool. So here is just another game, quite frankly, of demonic musical chairs. Great statement. Behind the populist framing lies a deeper truth. Public markets are saturated. Institutional alpha is drying up.

and private equity firms are sitting on aging portfolios. They can’t exit without fresh retail money to take the baton. Can tell you a bit of a story. I told this story before, and this was during the dot com run up. One of the firms that was really late to the party was Morgan Stanley. Morgan Stanley White.

shoe firm hanging out at the Long Island yacht clubs. Say Morgan Stanley was really, really late. And they wanted to get involved. I remember their head gal at the time was Mary Meeker, was their head analyst at the time. Morgan Stanley goes out and buys Dean Witter. Dean Witter was kind of an essence kind of like an investment firm brokerage firm for the masses.

They had offices, remember this back in the day, they had offices in Sears. Dean Witter offices were in Sears Roebuck. I’m saying, everybody’s like, what in the world? My God, Morgan Stanley’s buying Dean Witter. And I’m just shaking my head. And I knew exactly what was up. Morgan Stanley was buying Greater Fool’s. They were late to the party. They wanted to get their investors and all of these hot tech stocks. They wanted to start taking them public.

but they needed to find, they needed a base of greater fools so they can play the demonic musical chairs and burn them. They weren’t gonna burn their big clients, they were gonna burn their little clients. Now, again, think about this. I remember at the time, they actually changed their ticker symbol. S D W, that was kind of like the facade at the time.

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No, no, Morgan Stanley, we would never do that. Look at what we’re doing. We’re providing these great services to Dean Witter. Look what we have to offer as a.

Nope, nope, nope, nope. You’re fattening these Dean Witter clients up to be fed to the dragon. That’s what you were doing and that’s exactly what you did. Whatever happened to Dean Witter? Well, yeah, yeah, they were the greater fools and they got wrecked. Anyway, going on here.

Opening up 401Ks to private investments under an executive order circumvents much of the traditional legislative oversight that would have normally accompanied such a structural shift. It compresses a massive change in fiduciary standards into a top-down mandate, effectively using policy as a liquidity injection into elite capital channels. And it raises a subtle but critical question. What happens when the retirement system is turned into a shadow bailout engine?

for the private capital complex. Now, for the average person out there, wow, cool, look at this, I’m gonna have access to higher returns.

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most people in 401ks are gonna understand how private markets work, understand the types of fees that go along with this. They charge a fortune. I tell you what we charge here at Markowski Investments, average around 1 % on assets. Way more.

than that and that’s fees layered on top of your already your 401k fees. You’re not going to have much transparency. Like I said, they’re going to tell you what they want to tell you. Your lockup in this thing is forever. The mark to model valuations, obscure downside risk oftentimes till it’s too late. The democratization narrative masks a more urgent reality. Institutional capital is saturated.

IPOs, we seeing many IPOs? Pension funds, you think the colleges are buying into these things that much anymore? Nope. Nope. So again, again, demonic musical shares. They have to find another sucker, okay? I’m gonna put it you this way. And again, this is a great, great piece was put out by Endgame Macro. It’s not about giving you access.

It’s about getting them out.

That’s all. It’s not about giving you, look at that. It’s gonna give people access to private equity. It’s giving you an out. Again, what’s gonna, what I see is going to happen is everyday Americans are going to absorb the losses after all of the BS has gone away. All the BS is gonna go away.

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Again, it’s basically who’s going to be ended up carrying the bag, who’s going to lose the game of demonic musical chairs. And that’s the general public. Nothing new under the sun. Nothing new under the sun. I watched the same game being played throughout my career. There’s a right way. There’s a wrong way of doing things.

Do we get involved in some private equity for our clients? Yeah, we do. Limited, limited and for the right people and understanding what the companies have, what’s in their portfolio. The old Reagan trust but verify, okay? I don’t even trust but verify, okay? I am super skeptical.

Super skeptical, verify, then trust. It’s kind of how I work. So no, this is, in my opinion, this is not going to turn out well. You need help with your portfolio, you need help with your 401k, you need guidance. I guess get to our website, get in contact with us, sign up for our personal CFO program. That’s what we’re here for. Watchdog on wallstreet.com.