Trump advocates for incorporating private equity into 401(k)s, potentially exposing retirees to riskier financial investments

The Trump administration has issued an executive order that could broaden investment choices for regular investors in 401(k) and other defined contribution plans. This order aims to enhance diversification and returns in retirement portfolios by allowing alternative assets, such as private equity, real estate, digital assets, infrastructure, and private credit, to be included in these plans [1][2][3].

The order instructs the Department of Labor (DOL), Securities and Exchange Commission (SEC), and Treasury to reevaluate and revise regulations and guidance to reduce legal and regulatory barriers and litigation risks that have historically limited access to alternative investments within 401(k) plans [2][3][4][5].

Potential Benefits for Regular Investors

Greater Diversification: Access to non-traditional assets can diversify portfolios beyond typical stocks and bonds, which may reduce risk and improve returns over the long term [1][3].
Potential for Higher Returns: Alternative assets like private equity or real estate have historically offered higher returns than traditional public markets, which could enhance retirement savings growth [3][5].
Increased Access: More than 90 million Americans currently lack easy access to alternative investments in their retirement plans; this order seeks to democratize such access, which was previously reserved for wealthier or institutional investors [2][3].

Potential Risks and Challenges

Higher Volatility and Complexity: Alternative investments can be more volatile and complex, potentially unsuitable for all investors or improper without adequate guidance and education [1][2].
Liquidity Concerns: Many alternative assets are less liquid than stocks or bonds, making it harder to exit investments quickly, which could be problematic especially near retirement [2][4].
Higher Fees and Costs: Alternative asset classes often entail higher management fees, which may reduce net returns for plan participants [2][4].
Fiduciary and Litigation Risks: Plan fiduciaries may face increased risk of lawsuits if alternative investments underperform or if processes to choose these investments are not prudent or well documented [2][4][5].

Implementation Considerations

The regulatory process to change rules will take time, so new investment options including alternative assets may not be widely available until 2026 or later [1]. One expected pathway is via specialized asset allocation funds (such as target-date or lifecycle funds) that include alternative assets, which may manage some of the complexity and legal risks for fiduciaries [4].

The order may also spur private fund managers to tailor offerings to the retirement plan market, increasing product availability and innovation [5].

In summary, the executive order sets a regulatory framework intended to expand retirement investors’ access to alternative asset classes, offering the potential for better diversification and returns but also introducing risks related to complexity, liquidity, fees, and fiduciary responsibility that investors and plan sponsors will need to carefully manage [1][2][3][4][5].

The executive order does not mandate changes, but directs the Department of Labor to revisit and clarify its guidance on including private assets in retirement accounts. The Department of Labor 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. However, unlike stocks or bonds, key details like which companies are in a fund, what they earn, or how they're valued are often difficult or impossible to discern in private assets. Private equity firms can charge upwards of 2.5 percent in annual management fees, which is a steep premium compared to public market options. Private assets are notoriously opaque, making it harder for both investors and fiduciaries to make informed decisions.

Investors are advised to conduct their own independent research into investment strategies before making an investment decision. Past investment product performance is no guarantee of future price appreciation. When comparing funds, prioritize those with solid five- and 10-year returns and low expense ratios. Empower, one of the largest retirement service providers in the United States, announced plans to bring private assets into its offerings, which could open up new avenues for growth and diversification in retirement investment options. For cryptocurrency, the new order could move institutional giants like BlackRock and Fidelity to expand their crypto offerings at a more aggressive pace.

However, most experts recommend allocating no more than 5-10 percent into alternative assets, and that's if you have a high risk tolerance. This new directive may give plan sponsors legal cover to add alternative investments without worrying as much about lawsuits. 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.

The Trump administration's executive order could potentially revolutionize personal-finance by broadening access to various investment choices, including technology-driven assets like digital assets, in retirement plans such as 401(k) and other defined contribution plans [1][2][3].
This move towards diversifying retirement portfolios through investments in alternative assets may offer the advantage of lower political interference compared to general-news or economic policies influenced by politics [4].
To ensure successful and safe implementation, it's important for investors to educate themselves about the risks involved, such as higher fees, fees and costs, liquidity concerns, volatility, and complexity associated with alternative assets to make informed decisions [1][2][4].

Trump advocates for incorporating private equity into 401(k)s, potentially exposing retirees to riskier financial investments