Trump paves path for private equity and crypto in retirement accounts. Here's what it means for your 401(k)
Employers would have to decide to offer the plans — and experts anticipate many might be reluctant, as they could be held liable for losses.
Your 401(k) options could change soon. President Donald Trump signed an executive order Thursday to clear the way for Americans to invest their retirement savings in private equity, cryptocurrency, real estate and other alternative assets.
It’s a big win for the asset industry — giving financial managers access to some of the $12.2 trillion in Americans’ 401(k) and related retirement plans. Private assets can also be more lucrative, and the Trump administration said they can give retirement savers more opportunities.
“The theoretical benefits are that everyday Americans can invest in a broader menu of companies,” said Robert Brokamp, a financial planning expert at stock market research company The Motley Fool.
But there are higher risks — and not necessarily higher rewards. Critics say it could put people in danger of losing a huge chunk of their retirement savings.
“There is a lot less transparency and liquidity in private markets,” said Brokamp. “There’s not as much information about the companies, and it could be hard to sell your investments — especially during a panic and many, many investors are trying to sell at the same time.”
Plus the fees are higher for private assets than for typical 401(k) investments like mutual funds and ETFs. Benjamin Schiffrin, director of securities policy at Better Markets, said target-date mutual funds holding stocks and bonds charge 0.3% — while private funds can charge 1% to 2% in management fees and up to 20% in performance fees, and interval funds charge 2% to 3%.
Right now, private equity is technically allowed in retirement plans, but it’s rare — though some companies like BlackRock are planning new offerings. There are ways people can invest in crypto through their 401(k)s, too, but it’s also not common. And many 401(k) recordkeepers don’t support private equity funds yet.
The executive order could change that. It directs the Department of Labor to re-examine its guidance and clarify its position on alternative assets like private market investments, real estate interests and digital assets within 180 days. And it tells the Securities and Exchange Commission to consider ways to facilitate access to alternative assets for plans like 401(k)s.
“I think this is going to open the floodgates,” said Schiffrin. “I think up until now, you’ve actually seen a lot of hesitancy on the part of 401(k) plan managers to go down the road of including private market assets like private equity and private credit, things like that in the 401(k) plans.”
Employers would have to decide to offer the plans — and experts anticipate many might be reluctant, as they could be held liable for losses. However, with updated guidance from the government, employers may feel more comfortable adding these alternative assets into their 401(k)s. Many experts say that might not be a good thing.
SageMint Wealth managing partner Anh Tran, a certified financial planner and attorney, believes there’s a real risk that some investors will be drawn in by the allure of potentially higher returns from alternative investments without having the full picture. She said she would not advise anyone to make this kind of investment unless they fully understand the risk of losing that money entirely.
“It could be detrimental to less-informed investors whose only investment account is their 401(k),” said Tran. “Without proper guardrails, such as limiting exposure to 5% to 10% of the portfolio, these investors could be exposed to unnecessary risk, misaligned expectations and potentially irreversible losses.”
Knut Rostad, co-founder and president of the nonprofit Institute for the Fiduciary Standard, also fears private assets in 401(k)s could put retirement savers at risk of big losses.
“I think in practice, there’ll be many fiduciaries who ignore this directive because they understand precisely what will result from it,” he said, referring to Trump’s executive order. “The result will be a massive train wreck where many people are seriously hurt. Their retirement accounts will be annihilated.”
And cryptocurrencies come with their own dangers.
“It’s not clear what, if any, protections investors are going to have when it comes to investing in crypto,” said Better Markets’ Schiffrin. “So that just is a whole separate category of risks that having crypto in 401(k)s opens up.”
Meanwhile the Securities Industry and Financial Markets Association, a trade organization for broker-dealers, investment banks and asset managers, cheered the announcement as a win for retirement savers.
“As more U.S. companies choose to remain non-public, private markets have developed into a more robust asset class,” Kenneth E. Bentsen Jr., president and CEO of SIFMA, said in a statement. “Access to such investments, however, has been limited primarily to institutional and high net worth investors.”
He continued: “Policy changes to expand access to private markets investments — appropriately tailored under ERISA and SEC rules — could serve to improve diversification, democratize access, and offer more investment choices to the benefit of everyday retirement savers.”
Experts believe it could take months to see any changes. For now, they say education and safeguards are key — especially for younger investors and people without access to professional financial advice.
“There must be transparency, education and limits in place to prevent widespread harm,” said Tran. “Otherwise, we could be setting the stage for not only financial loss, but broader economic and social consequences.”
Comments
Post a Comment