Trump to Sign Order Allowing Alternative Investments in 401(k) Plans

WASHINGTON, Aug 7 (Reuters) – U.S. President Donald Trump is expected to sign an executive order on Thursday that aims to allow private equity, real estate, cryptocurrency, and other alternative assets in 401(k) retirement accounts, according to a White House official.

The order looks to make it easier for private equity and other fund managers to tap into trillions of dollars of Americans’ retirement savings. This could open a vast new funding source outside traditional stocks, bonds, and cash. Critics warn that this move may introduce excessive risk into retirement investments.

The executive order directs the Securities and Exchange Commission to revise regulations and guidance, facilitating access to alternative assets for participant-directed defined-contribution retirement savings plans.

Defined-contribution plans, which include 401(k)s, allow employees to contribute to their retirement accounts often with employer matching contributions. Funds in these plans belong to the employee but lack guaranteed payouts upon retirement.

Advocates argue that allowing alternative investments could provide greater diversification and potentially higher returns for retirement savers, who are primarily long-term investors. Melissa Barosy from the Investment Company Institute emphasizes that greater diversification can enhance investment opportunities.

However, financial advisors express concern that many 401(k) investors lack the knowledge to navigate these complex and often costly investments. Charles Massimo, a financial advisor in New York, warns that introducing sophisticated private equity options could lead to financial risks for unsophisticated investors.

The average management fee for exchange-traded funds is significantly lower than that of private equity firms, which typically charge high fees. Experts recommend thorough education for plan sponsors and investors regarding these investment options.

Some 401(k) plan administrators are already preparing to offer private equity options, including Empower Retirement, which oversees assets for more than 19 million investors. Empower’s president, Edmund F. Murphy III, stated that this would be a pivotal moment in retirement planning.

Although Trump’s executive order signals a significant policy shift, experts predict that changes in the retirement investment landscape will unfold slowly, as fiduciaries will need to conduct extensive due diligence before introducing these options.

Elizabeth Warren, a Democratic senator, has expressed concerns regarding investor protections in private markets, prompting requests for guidelines to ensure transparency and safety for investors.