Expands Accolades for Broader Investment Opportunities in Private Sector
In a move aimed at expanding investment options for Americans, President Donald J. Trump has signed an Executive Order to allow 401(k) investors to access alternative assets for better returns and diversification. This decision could open up fresh capital flows for the private market industry, which could use a boost.
The Order 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. The Secretary is also directed 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.
The Investment Company Institute (ICI) supports giving Americans access to private market investments through fund vehicles in their retirement plan accounts. The ICI looks forward to working with the White House, Congress, the SEC, and the Department of Labor as they work to expand access to private market investments for 401(k) investors.
However, private markets lack real-time information, clean data, and standardization compared to investing in stocks. Moreover, private markets tend to reduce transparency and increase potential risks for retail investors due to the opaque nature of private equity holdings, complex valuation methods, and high, layered fees. Participants and even plan sponsors often have limited visibility into the underlying assets, and valuations are proprietary and infrequent, making it difficult to assess real-time portfolio value or risks.
Fiduciaries responsible for 401(k) plans must carefully vet private market investment managers and structure offerings prudently to balance potential diversification and growth benefits against transparency and liquidity challenges. They must also navigate evolving Department of Labor guidance while managing heightened litigation risks related to excessive fees or underperformance claims.
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. Alternative assets, such as private equity, real estate, and digital assets, offer competitive returns and diversification benefits.
While private market investments offer potential diversification, they come with significant transparency drawbacks and potential financial risks that retail 401(k) investors and their fiduciaries need to critically evaluate before inclusion in retirement plans. Labor advocates and retirement security groups warn that private equity often charges high fees relative to public investments, with questionable returns and higher risks, which can erode workers’ retirement savings over time. There are concerns around inflated or hidden performance figures and risky strategies that might negatively impact long-term retirement security.
Through tax cuts and deregulation, President Trump is delivering on his promise to Make America Wealthy Again, empowering workers to save and invest more for their retirement. The executive order could be a significant step towards achieving this goal, providing Americans with greater investment opportunities and the potential for improved retirement outcomes. However, it is crucial for investors and their fiduciaries to approach private market investments with caution, carefully considering the risks and potential rewards before making any decisions.
[1] Investopedia. (n.d.). Private Equity in 401(k) Plans: Pros, Cons, and Risks. Retrieved from https://www.investopedia.com/terms/p/privateequity401k.asp [2] The Hill. (2020, August 31). Trump administration to ease restrictions on private equity in retirement plans. Retrieved from https://thehill.com/policy/finance/513216-trump-administration-to-ease-restrictions-on-private-equity-in-retirement-plans [3] The Wall Street Journal. (2020, August 31). Trump Administration Eases Rules on Private Equity in Retirement Plans. Retrieved from https://www.wsj.com/articles/trump-administration-eases-rules-on-private-equity-in-retirement-plans-11598786000 [4] The New York Times. (2020, August 31). Trump Administration Eases Rules on Private Equity in Retirement Plans. Retrieved from https://www.nytimes.com/2020/08/31/business/trump-private-equity-retirement.html
- The Secretary of Labor, in response to the Executive Order, is tasked with clarifying the Department's stance on alternative assets and outlining a suitable fiduciary process for offering asset allocation funds that contain investments in digital assets, private equity, and real estate.
- The Securities and Exchange Commission (SEC) has been directed to review and potentially revise regulations to support access to digital assets, private equity, and real estate for participant-directed defined-contribution retirement savings plans, thereby enabling greater investment opportunities and potential diversification for personal-finance management.
- Despite the strategic benefits, investors and fiduciaries must exercise caution when considering private market investments like digital assets and private equity due to inherent transparency drawbacks and financial risks that could potentially impact long-term personal-finance and retirement security negatively.
