Your 401(k) options are poised for significant changes following President Donald Trump's recent executive order. Signed on Thursday, this executive order aims to allow Americans to invest their retirement savings in diverse assets such as private equity, cryptocurrency, real estate, and other alternative assets. This move represents a substantial victory for the asset management industry, effectively opening the doors for financial managers to access a portion of the staggering $12.2 trillion held in American 401(k) plans and related retirement accounts.
Proponents of this executive order argue that it could provide retirement savers with more investment opportunities. According to Robert Brokamp, a financial planning expert at The Motley Fool, “The theoretical benefits are that everyday Americans can invest in a broader menu of companies.” The push for allowing private assets in retirement plans is seen as a strategy to enhance potential returns.
However, the potential for higher returns comes with increased risks. Critics caution that investing in alternative assets could jeopardize retirement savings. Brokamp emphasizes, “There’s a lot less transparency and liquidity in private markets.” Investors may find it challenging to access information about these companies, and selling investments during market downturns could prove problematic. Moreover, many 401(k) recordkeepers currently do not support private equity funds, making these investments rare.
Fees associated with private assets can also be significantly higher compared to traditional 401(k) investments like mutual funds and ETFs. For instance, while target-date mutual funds typically charge around 0.3%, private funds can incur management fees of 1% to 2% and performance fees of up to 20%. Interval funds may even charge between 2% to 3% in fees, leading to a substantial impact on overall returns.
The executive order mandates the Department of Labor to reassess its guidelines regarding alternative assets, including private market investments, real estate interests, and digital assets, within 180 days. Additionally, it instructs the Securities and Exchange Commission (SEC) to explore ways to facilitate access to these investments for plans like 401(k)s. Benjamin Schiffrin, director of securities policy at Better Markets, believes this could significantly change the landscape for retirement investments, stating, “I think this is going to open the floodgates.”
While the executive order has the potential to reshape 401(k) offerings, employers will ultimately decide whether to include these alternative assets in their plans. Experts suggest that many employers may hesitate to adopt these changes due to concerns about liability for potential losses. However, enhanced guidance from the government could encourage more employers to consider incorporating these options.
Financial experts like Anh Tran, managing partner at SageMint Wealth, warn that investors may be lured by the prospect of higher returns without fully understanding the accompanying risks. “It could be detrimental to less-informed investors whose only investment account is their 401(k),” Tran cautions. She advocates for implementing proper guardrails, such as limiting exposure to alternative investments to 5% to 10% of a portfolio, to mitigate risk.
Knut Rostad, co-founder and president of the Institute for the Fiduciary Standard, shares concerns that the inclusion of private assets in 401(k)s could lead to significant losses for retirement savers. He laments, “The result will be a massive train wreck where many people are seriously hurt.” Additionally, the risks associated with cryptocurrency investments remain unclear, with Schiffrin pointing out the lack of investor protections in this space.
The announcement has garnered positive reactions from industry groups. Kenneth E. Bentsen Jr., president and CEO of the Securities Industry and Financial Markets Association (SIFMA), views it as a victory for retirement savers. He notes, “Access to such investments has been limited primarily to institutional and high net worth investors,” and emphasizes that policy changes could enhance diversification and democratize access to investment opportunities.
As the landscape evolves, experts stress the importance of education and safeguards for investors, particularly younger individuals and those lacking professional financial guidance. Tran insists, “There must be transparency, education, and limits in place to prevent widespread harm.” Without these measures, the changes could lead to significant financial losses and, potentially, broader economic repercussions.
