The President’s Executive Order (EO) promoting alternative investments in 401(k)s arrived August 7th.
At just 700 words, the EO – titled “Democratizing access to alternative assets for 401(k) investors” – is true to the president’s bluster.
It argues for the indefensible. It is absurd.
Anticipation for this EO has been keen, and one Wall Street Journal article from March offers a glimpse of why. The subhead stated, “Momentum is building … to change rules blocking most Americans from investing in private equity”. The underlying theme: the injustice of preventing “ordinary people” from investing in private equity.
The head of a private-equity lobbying group, the American Investment Council, Drew Maloney, explains, “Everyday investors deserve more choices,” and the industry, “looks forward to working with investors on how we can help them responsibly strengthen their retirement plans …”
Alts excitement is not limited to Wall Street. “401(k) savers are getting ready to have more ways to diversify their retirement savings accounts,” says Donna Fuscaldo, retirement writer at Kiplinger.com.
The article from Fuscaldo enthuses, “Trump is leveling the playing field for everyday investors … Earlier this year the president’s DOL rescinded a 2022 Biden-era guidance calling on plan sponsors to use “extreme care” when considering crypto investments.
Only in the final paragraphs does Fuscaldo mention, “pros and cons … (and that) private assets will likely cost more … and liquidity concerns.”
The exuberance for alts in Kiplinger is curious and speaks to how deeply the alts virus has spread.
In contrast, the WSJ’s Jason Zweig wrote a sharply critical piece, “Wall Street’s Next Big Idea For Your 401(k) Is a Bad One.” The very first sentence of Zweig’s piece speaks loudly: “Wall Street is promoting a colossal lie.”
Zweig explains that money managers are racing to “stuff illiquid so-called private market assets into funds anyone can buy, including your 401(k. They say we all can earn high returns at low risk with non-traded “alternatives” … ”. Zweig calls this “bogus” and says investors should “just say no” to alts.
This is precisely the advice any serious fiduciary will give a retirement saver depending on her 401(k).
Zweig is in good company. The investor deemed the master of alternative investments, Yale’s endowment chief, David Swensen, from 1985 until his death in 2021, always recommended that individual investors stick to index funds.
The EO seems to believe a president can abolish decades of established jurisprudence by proclaiming, “It is the policy of the United States that ...”
This is false. The EO has no legal basis to do so.
The EO is reckless. It seeks to reconstruct fiduciary principles to fit alternative investments. Alts are far more costly, complicated, opaque and risky than typical 401(k) investments consistent with fiduciary duties. “Illiquid” is their middle name. Reckless, indeed.
The EO directs the Secretary of Labor to complete specific tasks. This includes providing guidance under ERISA for “making available” a fund with alternative assets. This also includes clarifying a prudent process to balance higher expenses, long-term returns and diversification.
The EO also directs the Secretary to propose “rules, regulations or guidance” to clarify fiduciary duties to plan participants and to “prioritize actions that may curb ERISA litigation”.
Following the order, the Secretary of Labor Lori Chavez-DeRemer and Deputy Secretary of Labor Keith Sonderling immediately announced their support. Interestingly, the statement from Secretary Chavez-DeRemer and Deputy Secretary Sonderling sounds as if from the White House and not the heads of the Labor Department.
A major push by the alts industry after the election is no surprise. The financial industry has battled to diminish or decapitate the fiduciary standard in Washington for 17 years. This effort launched by a President Executive Order is different. It is directed from the White House and openly attacks the legitimacy and purpose of fiduciary care and loyalty.
The EO is based on key misunderstandings about fiduciary law and ERISA. The purpose of the EO is to refigure fiduciary duties to benefit the alternative investments industry. There are no other winners. There are no independent voices arguing investors welcome much less benefit from this EO.
A final thought: The EO itself highlights the absurdity of what it promotes.
First, it seeks to provide guidance for fiduciaries to recommend or allow alts in 401(k)s. Then, it seeks to help fiduciaries avoid fiduciary litigation after doing what the President urges them to do.
Absurd, indeed.
Knut Rostad is co-founder and president of the Institute for the Fiduciary Standard, a not for profit dedicated to furthering fiduciary principles in investment advice through education and advocacy.
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