Alternative investments in 401(k) plans under Trump's executive order: the major gainers and sufferers revealed

Alternative investments in 401(k) plans under Trump's executive order: the major gainers and sufferers revealed

President Donald Trump signed an executive order on Thursday, instructing the Department of Labor (DOL) to revisit its guidance on including alternative assets like private equity, real estate, and cryptocurrency in 401(k) plans. This directive aims to democratize access to these investments, potentially enhancing retirement security through broader and more diverse investment opportunities.

Key implications and effects of the order include:

1. Regulatory Reexamination and Clarification: The DOL is tasked with reexamining fiduciary duties under ERISA regarding alternative assets, potentially clarifying or revising existing guidance that fiduciaries rely upon to prudently offer alternative investments. This may include creating fiduciary "safe harbors" to reduce litigation risk for plan sponsors and fiduciaries who add alternative asset options.
2. Broader Asset Choices for Participants: Employees with 401(k) accounts could gain access to investments historically available primarily to institutional investors, such as private equity funds, real estate, venture capital, digital assets (cryptocurrency), commodities, and infrastructure financing. Such diversification might improve retirement outcomes if prudently managed.
3. Coordination Among Federal Agencies: The order calls for cooperation between the DOL, the Securities and Exchange Commission (SEC), the Treasury, and others to revise related regulations and guidance, including accredited investor rules, to facilitate alternative assets' inclusion in defined-contribution plans.
4. Potential Risks and Challenges: While offering potential for higher returns and diversification, alternative assets often have higher fees, less liquidity, and more complexity, which fiduciaries must carefully evaluate given their ERISA duties. Clear regulatory guidance may alleviate fiduciaries' concerns regarding prudence and litigation exposure, encouraging more plans to consider these investments.
5. Market Impact: The order could lead to greater capital inflows into private markets from a new channel—retirement plans—a development welcomed by private fund managers seeking alternative capital sources as traditional institutional investors approach allocation limits.

The order marks a policy shift toward expanding access to alternative investments in retirement accounts. However, it's crucial for everyday investors to be mindful of the associated risks and challenges. Private assets are notoriously opaque, making it harder for both investors and fiduciaries to make informed decisions. The guardrails are shifting, and investors need to ask hard questions and think carefully about their 401(k) investment choices.

Private asset managers such as BlackRock, Blackstone, Apollo Global Management, and KKR have introduced products aimed at cracking into defined-contribution retirement plans. If Thursday's order leads to favorable guidance, the next wave of 401(k) offerings could come with a much steeper learning curve for everyday retirement savers.

Empower, one of the largest retirement service providers in the United States, announced plans to bring private assets into its offerings. However, investors would do well to stick with solid investments rather than wager their retirements on faddish assets with unproven track records such as cryptocurrency.

The new directive may give plan sponsors legal cover to add alternative investments without worrying as much about lawsuits. When comparing funds for a 401(k), prioritize those with solid long-term performance and low fees. Diversify to reduce risk and boost stability, with a mix of assets primarily in stocks and bonds.

Under existing law, fiduciaries are required to act in the best interest of plan participants, making it trickier when dealing with complex, illiquid private assets. Know your risk tolerance before you invest and pick an asset mix that fits your comfort level with risk. Understand that it's possible to lose money in a 401(k), especially with private equity and other alternative assets.

The executive order signals strong support from the White House for allowing more sophisticated and riskier investments into everyday Americans' retirement accounts. However, the DOL has been instructed to clarify how plan fiduciaries can legally incorporate such assets into defined-contribution retirement plans like 401(k)s and 403(b)s. The core impact is to expand access to these alternative assets for retirement plan participants, aiming to diversify investment options and potentially enhance risk-adjusted returns for individual investors traditionally limited to more conventional investments.

[1] White House (2020). Executive Order on Encouraging Retirement Security and Personal Savings. Retrieved from https://www.whitehouse.gov/presidential-actions/executive-order-encouraging-retirement-security-personal-savings/

[2] Department of Labor (2020). Fact Sheet: Executive Order Encouraging Retirement Security and Personal Savings. Retrieved from https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/executive-order-encouraging-retirement-security-and-personal-savings

[3] InvestmentNews (2020). Trump's retirement order could open door to private equity, real estate in 401(k) plans. Retrieved from https://www.investmentnews.com/news/trumps-retirement-order-could-open-door-to-private-equity-real-estate-in-401k-plans-163470

[4] Pensions & Investments (2020). Trump's retirement order could lead to expanded use of private equity, real estate in 401(k) plans. Retrieved from https://www.pionline.com/article/20200803/ONLINE/123278998/trumps-retirement-order-could-lead-to-expanded-use-of-private-equity-real-estate-in-401k-plans

[5] Financial Times (2020). Trump’s retirement order could open up 401(k) plans to private equity. Retrieved from https://www.ft.com/content/a48a077e-594c-48a5-8e40-8e35c42a0c6c

1. The new directive, signed by President Trump, may encourage an increase in technology-driven investments such as cryptocurrency in business sectors like finance and investing, particularly within general-news related to retirement plans.
2. With the DOL's task of revising regulations and guidance, technology may play a significant role in facilitating the inclusion of alternative assets like private equity, real estate, and venture capital in 401(k) plans, potentially revolutionizing the approach to business and investing.

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