Trump greenlights alternative investments in 401(k) accounts – Industry reacts

President Trump says that allowing workplace retirement savers to invest in private equity, cryptos, and other alternative investments will broaden choice and be good for Americans.

As anticipated by InvestmentNews, the president signed an executive order late Thursday which the White House says will “allow 401(k) investors to access alternative assets for better returns and diversification.”

The White House added that “President Trump wants to give American workers more investment options in order to attain stronger and more financially secure retirement outcomes.”

Official stats show that more than 90 million Americans participate in employer-sponsored defined-contribution plans but, unlike wealthy investors and retirement plans for government workers, most are not able to invest in alternative assets, such as private equity, real estate, and digital assets.

“My Administration will relieve the regulatory burdens and litigation risk that impede American workers’ retirement accounts from achieving the competitive returns and asset diversification necessary to secure a dignified, comfortable retirement,” the executive order states.

The order:

• directs the Secretary of Labor to reexamine the Department of Labor’s guidance on a fiduciary’s duties regarding alternative asset investments in ERISA-governed 401(k) and other defined-contribution plans.
• instructs the Secretary of Labor to clarify the Department of Labor’s position on alternative assets and the appropriate fiduciary process associated with offering asset allocation funds containing investments in alternative assets.
• directs the Secretary of Labor to consult with the Secretary of the Treasury, the Securities and Exchange Commission, and other federal regulators to determine whether parallel regulatory changes should be made at those agencies to give effect to the purpose of the Order.
• directs the Securities and Exchange Commission to facilitate access to alternative assets for participant-directed defined-contribution retirement savings plans by revising applicable regulations and guidance.

As the industry began to digest the news, the Investment Company Institute’s president and CEO Eric J. Pan said:

“ICI supports giving Americans the opportunity to access private markets through fund vehicles in their retirement plan accounts just as millions of Americans already benefit from private market investments through institutional pension funds. Retirement savers are the ultimate long-term investors and would benefit from the diversification offered by the inclusion of private assets. We look forward to working with the White House, Congress, the SEC, and the Department of Labor as they work to expand access to everyday investors.”

Stifel chief Washington policy strategist Brian Gardner expects that the Department of Labor will need to review its guidance for plans’ fiduciary responsibilities, as lost money in private investments from 401k participants could lead to lawsuits against plan managers.

Gardner also says that the SEC could lower the threshold for determining accredited investor status (currently $200k over two years for individual filers) or consider new tiers and thresholds for investors to gain access to specific private investments.

TIAA and Nuveen applauded the Trump administration’s move.

“We believe end investors can benefit from the advantages that private investments can offer when embedded within professionally managed vehicles like target date funds or through guaranteed annuity products, and we have long incorporated alternative investments in our guaranteed income products,” the organizations said in a statement shared with InvestmentNews.

“As policymakers continue exploring ways to improve retirement security, we strongly urge them to improve DC plans’ access to lifetime income solutions that offer a variety of liquidity features.  A guaranteed lifetime income component can address longevity risk as workers live longer in retirement and can help ensure Americans don't outlive their savings—a critical complement to any retirement investment strategy,” the statement added.

Partners Group was one of the first private markets firms to launch an offering for the US DC market, in 2015. Its CEO David Layton welcomed the news.

"With this Executive Order, the US government has taken a meaningful step towards removing any legal uncertainty for fiduciaries evaluating the inclusion of private markets in DC plans,” he said. “Ultimately, this will create greater parity between the investment options and retirement outcomes available to beneficiaries in DB and DC plans. Private markets are stewards of an increasing portion of the real economy, so it is imperative that they are accessible to all investors."

Meanwhile, Daniel Cahill, head of US Defined Contribution at the $174 billion AUM firm added:

“With this clear guidance from the US government, we anticipate that more private markets firms will commit to developing the capabilities needed to build products that meet the specific requirements of the DC market. With time and choice, we believe that DC plans will adopt similar asset allocations to DB plans, incorporating private markets as a key potential performance driver."

State Street Investment Management's head of US retiremenent, Brendan Curran commented:

“Investors are facing a greater need for diversification as they save for retirement; exposure to private markets, when done responsibly, has the potential to allow retirees to benefit from the returns of an asset class that has been historically limited to institutional investors and wealthy individuals."

“This is a pivotal moment in the evolution of retirement planning,” said Edmund F. Murphy III, President and CEO of Empower. “By opening the door to additional types of assets,  we can offer everyday savers access to the same opportunities that have historically powered institutional portfolios.”

“Private investments in 401(k) plans have the potential to improve participant outcomes by providing individuals access to the same range of investments as professional institutional investors, which seek to provide enhanced long-term returns and added diversification," commented Ari Jacobs, global head of investments at Aon. "Implementation of these solutions requires thoughtful and robust analysis of key factors such as manager skill, fees, liquidity and valuation. This Executive Order, which directs the DOL and SEC to coordinate on guidance, represents a meaningful step towards addressing these barriers." 

Morningstar's Hal Ratner assessed the impact of the changes brought about by the executive order in an article including these key takeaways:

• Plan sponsors long focused on low-cost menus must now contend with complex, high-fee private market structures.
• While private market investments are expensive, fees may decline over time, and operational hurdles like cash flow management can be addressed through collaboration across asset managers, recordkeepers, and advisors.
• Key stakeholders are highly aware of the risks—one misstep in implementation could derail private market adoption in 401(k)s.
• Current demand from plan sponsors and participants is limited; the push is primarily supply-driven by asset managers eyeing the $12.5 trillion DC market.
• Despite low demand, Morningstar believes private markets offer long-term value, with far more firms staying private longer, and earlier-stage growth opportunities shifting outside the public markets.
• The evolution of DC plans mirrors the defined-benefit systems they replaced; adding private market investments is the next phase in that ongoing transformation.

While many advisors and clients are expected to welcome the ability to add alternative investments to 401(k) accounts, there is likely to be a lot of discussion around suitability given concerns often raised about liquidity, transparency, and some other key elements of private markets.

Meketa Capital CEO Michael Bell recently shared with InvestmentNews how the PE push in retirement plans may benefit investors, why warnings around risks may be overplayed, and what it will take to get plan fiduciaries comfortable with private investments.