Alternative investments in 401(k)s under Trump's new executive order - shining spotlights on the major victors and the unfortunate setbacks

Alternative investments in 401(k)s under Trump's new executive order - shining spotlights on the major victors and the unfortunate setbacks

In a move aimed at diversifying retirement portfolios, President Donald Trump has signed an executive order directing the Department of Labor to revisit its guidance on including alternative assets like private equity, real estate, and cryptocurrency in 401(k) plans.

This potential shift could bring significant changes to the retirement landscape, offering higher returns and broader diversification for those with an appropriate risk tolerance and a long-term perspective. However, it also introduces substantial risks and challenges related to investment complexity, regulatory uncertainty, and fiduciary responsibility.

Potential for Higher Returns and Diversification

Alternative assets may provide competitive returns and broader diversification compared to traditional investments like stocks and bonds, potentially enhancing retirement outcomes. For instance, private equity can offer steady growth and income over the long term, while cryptocurrencies, though volatile, have shown potential for extraordinary gains.

Regulatory Overhaul and Fiduciary Guidance

The executive order mandates a reexamination of Department of Labor (DOL) guidance on fiduciary duties under ERISA to clarify when and how fiduciaries can prudently offer alternative assets. It also proposes creating safe harbors to limit fiduciary litigation risks, which have traditionally discouraged plan sponsors from including these assets.

Increased Complexity and Risk for Investors

Alternative investments such as cryptocurrencies and private equity are often less liquid, more volatile, and less transparent than traditional assets. This complexity requires robust investor education and risk management.

Operational and Legal Challenges

Many 401(k) plan providers are cautious about adopting these options due to concerns about administrative costs, regulatory compliance, potential lawsuits, and the complexity of valuing alternative assets within defined contribution plans.

Slow Adoption Expected

Despite regulatory support, uptake may be gradual as providers and fiduciaries assess risks and develop appropriate offerings. Education for investors on the risks and benefits will be critical to ensure informed choices.

Empower's Entry and Private Asset Managers' Push

Empower, one of the largest retirement service providers in the United States, announced plans to bring private assets into its offerings. Private asset managers such as BlackRock, Blackstone, Apollo Global Management, and KKR have all introduced products aimed at cracking into defined-contribution retirement plans.

The Learning Curve Ahead

If the order leads to favorable guidance, the next wave of 401(k) offerings could come with a much steeper learning curve for everyday retirement savers. Market-based investments in a 401(k) can lose value, but private equity and other alternative assets come with even greater risk.

Navigating the Uncharted Territory

When comparing funds, investors should prioritize those with solid long-term performance and low fees. Private equity firms can charge upwards of 2.5 percent in annual management fees and often keep 20 percent of profits above a certain threshold. Private assets are notoriously opaque, making it harder for both investors and fiduciaries to make informed decisions.

In sum, while the executive order aims to democratize access to potentially rewarding alternative investments within retirement plans, it also raises concerns related to safeguarding retirement savings from the volatility, illiquidity, and fiduciary risks associated with these asset classes. Coordinated regulatory clarifications and investor education will be essential to balance innovation and protection.

1. The potential shift in retirement portfolios by including alternative assets like private equity, real estate, and cryptocurrency could offer higher returns and broader diversification, given their competitive returns and potentential for extraordinary gains compared to traditional investments.
2. In order to clarify when and how fiduciaries can prudently offer alternative assets, the executive order mandates a reexamination of Department of Labor (DOL) guidance on fiduciary duties under ERISA, and proposes creating safe harbors to limit fiduciary litigation risks.
3. Adopting alternative investments such as cryptocurrencies and private equity comes with increased complexity due to their less liquid, more volatile, and less transparent nature, requiring robust investor education and risk management.

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