President Donald Trump was expected to sign an executive order Thursday to make it easier for 401(k)s and other employer-sponsored retirement plans to offer alternative assets, including private equity, real estate, and cryptocurrency.
The order reportedly calls for the Labor Department and Securities and Exchange Commission to provide employers with guidance about offering access to alternative investments in their retirement plans.
There wasn’t a law prohibiting plan sponsors from offering these types of investments to employees, but most have traditionally opted against doing so as they are considered riskier investments than traditional ones, like publicly traded stocks and bonds. They are also more expensive, less transparent, and less liquid, making them harder to access.
High-net-worth investors would benefit most from this, as they are often able to take larger risks with their investments. However, many financial experts warn against employers making hasty changes to plans.
Investment selection and management of 401(k) accounts is governed by fiduciary rules, which Edward Gottfried, the vice president of product at Betterment at Work, said require an employer and any advisor they work with to review the investments for fair fees and performance in line with general market returns.
Gottfried said it would be “extremely challenging” for private securities to meet the standards expected of them, which is why he said employers should avoid rushing to offer these new investment options to their employees.
Certified financial planner Scott Bishop said that while his firm believes in having alternative assets to promote a diversified portfolio, it requires them to do “painstaking due diligence” to ensure they find the best managers who specialize in each area of private investing.
“I expect the stuff that comes into the plans will be expensive, opaque, and have mediocre returns,” and they will most likely not have “best in class” managers to walk clients through their options, Bishop said.
Companies have already jumped into action before the executive order is signed.
BlackRock, an asset manager, announced in June that it will launch a 401(k) target-date retirement fund that includes private investments in 2026. Blue Owl Capital, another asset manager, announced last month its plan to partner with retirement provider Voya Financial to develop private markets investment products for defined contribution retirement plans. Empower, another big name in retirement, said in May that it will also offer private investments in some workplace accounts as early as this year.