Recently, President Donald Trump issued an executive order that could allow alternative investments to be included in 401(k) plans. This change might influence how millions of Americans manage their retirement savings.
The order, titled “Democratized Access to Alternative Assets for 401(k) Investors,” outlines a pathway for integrating assets like private equities, real estate, and cryptocurrencies into retirement accounts.
What to Keep in Mind
While this executive order won’t alter current laws on workplace retirement planning, it does instruct the Department of Labor to explore ways to make such investments more available. This move has been seen as a significant win for those in asset sectors, as they have long sought to tap into the approximately $12.2 trillion held in retirement plans.
“For decades, public pension funds have engaged with private assets because they typically yield better long-term returns and are a reasonable approach to diversifying retirement savings,” noted Will Dunham, chairman of the American Investment Council, which represents the private equity sector. “This executive order from the president is a pivotal step that could allow more Americans to benefit from enhanced returns and secure retirements.”
Yet, there are concerns that retirement portfolios should still be managed with caution, as the introduction of these investments could increase complexity, risk, and fees that might erode savings.
Goppy Shah Goda, an economist and director of a retirement security project, mentioned, “Alternative investments often lack liquidity and can be less stable, which means investors might not have immediate access to their funds, increasing their risk.” He added that these investments often come with elevated fees, which can diminish potential returns.
Before accepting these new investment strategies, individuals involved in planning need to be well-informed about the implications.
What Plan Administrators should Know
Simon Tan, Accelex
“For managers, the greatest challenge is transparency,” stated Simon Tan, director at Accelex, a fintech firm that provides tools for private market investors.
“Typically, private fund partners prioritize confidentiality regarding investments in private companies, which can give them an edge over competitors,” Tan explained. “Retail investors, however, will expect the same level of clarity and prompt information that they see in the open market, like with cryptocurrencies, which can be an issue for private equity.”
To address this gap, Tan suggested managers should consider investing in specific AI and automation aimed at the private market to gather and present data to investors effectively. Otherwise, they might lose investors to those who do.
Bill Cox, KBRA
“The private market represents a foundational strength, and access to it can benefit both retail and institutional investors—assuming proper diligence is practiced,” commented Bill Cox, who works with a New York-based rating agency.
Cox said that to venture into alternative assets successfully, “we must be mindful of liquidity risks, fee structures, and the crucial factor of choosing the right managers.”
“The differences in performance don’t stem from the assets themselves but rather from which managers are handling the 401(k) investments. We anticipate this manager differentiation to grow over the next three to five years,” he noted.
Carol McClarnon, Carlton Fields
According to attorney Carol McClarnon, those involved in planning must recognize a possible increase in litigation risks associated with “excessive fees” lawsuits against 401(k) plan sponsors.
She highlighted that while Trump’s order directs the Labor Department to consider these issues in future guidance, it’s wise for sponsors and employees lacking expertise to rely on pooled investment funds overseen by knowledgeable advisors.
John Hunt, Sullivan & Worcester
John Hunt, a partner at a global law firm, emphasized that the team’s main concern is the debt incurred when figuring out fiduciary planning for participants’ investments.
“Understanding the risks and expenses tied to alternative investments is critical for both planners and employees,” he explained, adding the importance of grasping financial literacy before investing in these options.
Tom Hogan, Haynes Boone
Tom Hogan, a lawyer specializing in employee benefits, warned that the higher fees linked to private equity could expose planning sponsors to fiduciary lawsuits.
He noted that under the Employee Retirement Income Security Act, planning sponsors need to adhere to high standards regarding the selection and oversight of investments.
Additionally, he stressed that alternative investments carry “liquidity and valuation issues,” making it hard to assess their real-time value.
Private Equity Stakeholder Project (PESP)
PESP remarked that private market assets, while valuable, can be challenging to liquidate. “Determining their actual worth is tough since private equity does not trade on public exchanges,” they noted.
They expressed concerns that private equity funds might inflate their reported values, complicating investment assessments for managers.
What Employees Need to Know
Simon Tan, Accelex
Tan highlighted that employees should be aware of higher fees and the inherent complexities of private equity, as well as the unique characteristics surrounding returns, risks, and liquidity.
“Understanding asset allocation and portfolio construction becomes crucial,” he advised. “Employees who are used to simple stock and bond options will need to reassess their approach to achieve proper diversification.”
He added that employees considering allocating part of their retirement savings to private equity need to educate themselves on its benefits and drawbacks, noting that this experience differs significantly from traditional market investments with real-time pricing.
Rob Sichell, K&L Gates
Rob Sichell remarked that planning participants must ensure their investments are well-suited for defined contribution plans. They need to consider the liquidity, fee structures, and whether they are managed by knowledgeable trustees.
Even if private equity options are available in their plans, Sichell urged participants to assess if investing is prudent for their unique financial situations.
Private Equity Stakeholder Project (PESP)
PESP cautioned that higher costs associated with private equity could erode savings, as these funds often charge significantly more than index funds, which can accumulate over time.
Private equity investments typically require long-term commitments, meaning employees could face liquidity issues and delays if they wish to withdraw their money.
Surprisingly, PESP noted the executive order’s encouragement of private equity investments, especially in light of their recent underwhelming performance compared to the S&P 500.
Las Yvinjack, Aon
Las Yvinjack of Aon cautioned that employees might be faced with high costs and limited liquidity. “Unlike publicly traded stocks, private investments don’t provide daily pricing or straightforward disclosures,” he stated. He advised using private assets only within professionally managed portfolios overseen by trained trustees.
What Lies Ahead?
Experts underscored that the executive order mainly instructs the Department of Labor to reassess current regulations concerning alternative investments.
As John Hunt pointed out, “No formal proposals are on the table at this moment.” The Labor Department is expected to devise new plans, but that process could take time.
Simon Tan reiterated, “This change won’t happen overnight. Private equity won’t be available in every 401(k) plan right away.” He also mentioned that while potential returns are attractive, concerns about high costs, lack of liquidity, and challenging performance data remain significant considerations. The timeframe for implementing these changes is still uncertain.
Trump has given the Labor Department 180 days to revisit and clarify the government’s stance on alternative assets, including private market investments, real estate, and digital assets in relation to 401(k) plans.
