Millions of Americans saving for retirement could soon see some drastic changes in how their 401(k) accounts are managed. President Trump is preparing to issue an executive order that will allow 401(k) plans to invest in private assets. Experts have termed this the biggest change in decades to the U.S retirement system.
According to The Wall Street Journal and Bloomberg, the executive order from the president will direct the Department of Labor and the Securities and Exchange Commission to issue formal guidance to employers. This formal guidance will offer them access to private equity, real estate, hedge funds, venture capital, and probably even cryptocurrencies within employee 401(k) plans.
What the Government Just Confirmed About 401(k) Changes
Currently, 401(k) retirement plans are limited to publicly traded investments such as bonds, stocks, and mutual funds. However, the upcoming change will open access to non-public assets, something private equity firms have pushed for over many years.
A White House spokesperson confirmed that President Trump is “committed to restoring prosperity for everyday Americans and safeguarding their economic future,” but clarified that no decisions are official “unless they come from President Trump himself.”
With final reviews still underway, insiders expect the executive order to be signed soon, and this will usher in major transformation for how Americans save for their retirement.
What This Means for Your 401(k)
If the proposed policy is enacted, your employer could soon offer additional investment options in your 401 (k) plan. These options include:
- Private equity
- Real estate
- Hedge funds
- Venture capital
- Gold and crypto assets (in some cases)
According to a recent Empower survey involving 2,000 retirement savers, 74% believe that access to private investments could help build more wealth like the ultra-wealthy. 72% support the availability of diversified investment options in their retirement accounts.
Bryan Corbett, CEO of the Managed Funds Association, said:
“Expanding access to alternative investments in 401(k) retirement plans will provide more Americans with the diversification and investment options needed to build wealth and save for a successful retirement.”
The Pros and Cons of the 401(k) Private Investment Shift
Although 72% support the availability of diversified investment options in their retirement accounts, critics have warned that private investments carry more risk. Additionally, they are often illiquid, charge higher fees, and involve investing or longer time.
“Private equity kind of always gets what it wants in Congress, but I think it’s a bad idea,” Jeffrey Hooke, professor at the Johns Hopkins Carey Business School, said. “It’s illiquid, the fees are very high. Private equity funds, for the most part, don’t beat the stock market.”
“I don’t think it’s a good investment for the rank-and-file retail market,” Hooke added.
Gopi Shah Goda, senior fellow at the Brookings Institution, added:
“These investments are complex and may not align with the needs of average 401(k) participants, particularly those nearing retirement.”
Despite the critics, some asset managers like Apollo Global Management, State Street, and Blue Owl are already launching private investment products aimed at retirement plans.
Why the 401(k) Market Is a Target
The U.S. 401 (k) is worth $12.2 trillion. As of last year, only 2.2% of plan sponsors offered any alternative investments. Private equity firms consider the new policy as a way to tap into a pool of capital that has been previously restricted.
Lisa Loesel, a partner at Seyfarth, noted:
“There are a lot of fiduciary considerations. This executive order may help fiduciaries feel more confident by giving them specific procedures to follow.”
For employers to adopt the private investments, they will undergo a rigorous fiduciary process and consult with investment advisors to ensure they comply and are suitable for their workplace.
What Happens Next for Retirement Savers?
The Trump administration is still reviewing the executive order, and it could be announced within weeks. Once issued, the Department of Labor will craft guidance for employers and retirement plan administrators.
It is important to note that the change will not be automatic.
Conclusion
The government is preparing to unlock access to private investments for millions of retirement savers, and soon, they could see big changes in their 401 (k) plans. Although the investment plans offer higher returns, they are complex and carry more risk.