Changes to 401(k) Investments

In August, President Donald Trump signed an Executive Order allowing for the addition of certain “alternative assets” in 401(k) plans. This includes options like private credit, private equity, and even virtual currencies, which could broaden the investment scope for Americans in their retirement accounts.

Supporters see this change as a way to provide access to investment opportunities that have been mostly reserved for wealthy individuals and institutions. However, there are concerns. Critics argue that these assets can come with risks that everyday investors might not fully grasp.

So, how might this Executive Order reshape America’s retirement landscape? And how can you safeguard your portfolio against unnecessary risks? It’s something worth considering.

The U.S. Securities and Exchange Commission has noted that alternative investments like private equity and hedge funds have typically only been available to “accredited investors”—those with a net worth over $1 million (excluding their home) or an annual income exceeding $200,000. Yet, a shift is happening. Retail investors are increasingly curious about these options, with a recent survey showing that 21% are considering alternatives, and an additional 5% planning to invest in them.

Many investors are looking to diversify beyond traditional stocks and bonds, seeking perhaps higher returns. Some financial advisors even suggest changing the classic 60/40 ratio of stocks and bonds to something like 50/30/20, incorporating 20% in alternative assets. The rationale? These assets might offer some stability during market fluctuations that typically affect stocks and bonds more severely.

Take gold, for instance. It’s often regarded as a stable alternative asset, especially during unstable market periods. Recently, gold prices have soared to historical highs, hitting around $4,300 per ounce.

Another alternative asset gaining traction is real estate. Interestingly, you don’t need to buy whole properties to invest in this market. Options like investing in shares of vacation homes and rental properties can open doors without the burdens of being a landlord. There are platforms that let you invest in these shares, taking the hassle out of property management.

On top of that, commercial real estate has typically been available only to an elite group of investors. Now, opportunities are emerging that allow more people to diversify into this sector. With platforms catering specifically to grocery store properties, for instance, liquidity concerns are somewhat alleviated by stable tenant agreements.

Now, let’s discuss private market funds. These investments pool money from investors into non-public assets. Though they promise higher returns, the reality can sometimes be murky, hidden by high fees and limited access. It’s not all that rare for lofty performance claims to distract from potential flaws in planning.

Moreover, the liquidity issue presents a challenge. Selling your stake in a private investment isn’t necessarily straightforward, as indicated by experts. Charles Rotblut from the American Association of Individual Investors pointed out that trying to exit a private equity investment can be fraught with difficulties, mainly due to lack of market options.

Worse yet, a report from the Economic Policy Institute raised alarms about widespread retail access to these complex and sometimes opaque assets, highlighting the risk of creating a “systemic risk machine” for future economic downturns.

For most, sticking with low-cost index funds will likely remain a good investment strategy. Yet, if you’re considering alternative assets, it might be wise to chat with a financial advisor. A cautious approach could suggest designating a small portion of your portfolio—maybe around 5% to 10%—to these assets to balance out risks while still benefiting from potential market stability.

Finding tailored advice is crucial if you want to explore whether such alternatives might be beneficial for your financial situation. There are services that can help connect you with qualified financial advisors to discuss your options without any commitment on your part.