In positive news for American workers saving for retirement, President Donald Trump signed an executive order last Thursday authorizing managers of defined contribution plans, such as 401(k) plans, to add private equity and other alternative assets, including bitcoin, other cryptocurrencies, and real estate, to retirement savings accounts. The far Left is wringing its hands about the order, but the nation’s savers should be cheering.
401(k) retirement plans are popular, employer-sponsored retirement savings plans that offer significant tax advantages. The plans are structured to help employees save for retirement through automatic payroll deductions and investment growth.
Under the executive order, the Labor Department will provide the guardrails for 401(k) and other defined contribution plans to invest in alternative assets. The Labor Department guidance will ensure that fiduciary responsibilities are satisfied. Retirement savers will have safe access to the higher returns often generated by private equity, crypto assets, and other alternative assets, including real estate.
This year, more than 90 million Americans collectively invested $12.2 trillion through 401(k) plans, with their assets held in a combination of debt and equity from publicly traded companies.
Through the executive order, holders of defined contribution plans can earn returns superior to those of the public markets. For example, buyout funds, a type of private equity, have generated returns that beat public market investments by around 2% per year on average over the past 30 years. Moreover, private credit, another private market asset class that will be available to retirement savers, has outperformed public debt markets on average by 2% a year over the past decade.
However, it’s not all blue skies for investing retirement funds in alternative assets. Private assets are less liquid than public market assets such as the stocks that make up the S&P 500 index, the benchmark of United States equity investments. Lower liquidity creates friction. Buying and selling prices can be higher or lower. The true market value of a private market asset could be more difficult to quantify.
Private assets are not as transparent. Disclosure rules are less stringent than for public market assets. The opportunity for malfeasance is higher in private markets than in the very open public equity and debt markets of the U.S. Fees for investing in alternative assets can be more expensive. Due diligence for individual retirement savers could be slightly more burdensome. However, higher potential returns and increased diversification arguably would justify higher fees and greater personal responsibility.
Of course, historical returns are no guarantee of future returns. The typical owner of a defined contribution plan might be disappointed if future returns from alternative asset classes do not generate returns equal to the public stock market, where returns have averaged almost 10% per year over the past 50 years.
For defined contribution plan managers who are concerned about added risks and fees, a relatively safe way to invest in alternative assets is through one of America’s giant asset managers. Very large financial institutions take fiduciary responsibility very seriously. They go to extreme lengths to protect their clients’ assets and avoid damaging their own reputations.
Above all, Trump’s executive order is good news because it encourages savers’ personal responsibility and reduces the government’s role in personal finances.
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At a time when the Social Security and Medicare trust funds are rapidly depleting, it’s great news that workers now have several investment alternatives to ensure their retirement futures are not in jeopardy.
After all, personal liberty and responsibility are at the core of the country’s culture.
James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be followed on X and reached at [email protected].
