Democratizing access to asset classes isn’t reserved for startups and fintechs only. President Trump is also trying to level the playing field, paving the way for everyday investors to invest in alternative investments through their 401(k) or other defined contribution plans.
Trump is expected to sign an executive order in the coming days directing the Labor Department and the Securities and Exchange Commission to issue guidance allowing employers and plan sponsors to include private assets in 401(k) plans.
That means employees could have access to investments such as private equity, hedge funds, private credit, real estate investment trusts (REITS), and venture capital funds through their 401(k)s. Trump is also making it easier for plan sponsors to include cryptocurrency in 401(k) plans.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
It's part of the president’s efforts during his first six months in office to make his mark on retirement accounts in America. Earlier this year, the president’s Department of Labor (DOL) rescinded a 2022 Biden-era guidance calling on plan sponsors to use "extreme care" when considering crypto investments.
That change relieves regulatory pressure on plan sponsors. The DOL is scaling back what it says is overreach on the part of government agencies. This move aligns with Trump's strong support for the cryptocurrency industry. Allowing private assets into 401(k)s is another example of Trump’s deregulation penchant.
Under Trump, “there’s going to be more access, fewer limitations, fewer restrictions and more options available for individuals within 401(k) structures,” says Sarah Gaymon, CPA, director of tax services at Berkowitz Pollack Brant Advisors + CPAs. “Within the next couple of months or years, there will be even more exciting options.”
Private assets in 401(k)s: how it might work
While details are scant, private assets are expected to be included in 401(k)s primarily via managed accounts. This means investors would likely access them through structured products, such as specialized funds, rather than owning individual private assets directly.
“These types of vehicles made available inside a 401(k) are best delivered in a professionally managed solution or a target-date fund with advice wrapped around that,” said Matt Radgowski, CEO of Halo Investing. That means investors will pay more for access to private assets than they would for investing in a stock or bond ETF.
Proponents of including private assets in 401(k)s argue it brings much-needed diversification to defined contribution plans beyond stocks and bonds. It's something high-net-worth savers have been asking for.
“Adding diversifying asset classes to a defined contribution portfolio can generate four or more years of additional retirement income,” says Josh Cohen, managing director and head of client solutions at PGIM DC Solutions.
“Many of these could be particularly beneficial to pre-retirees and retirees given the characteristics of such asset classes intended to protect against downside risk and inflation,” he says.
In addition to providing diversification, it could also provide individuals in higher income tax brackets who live in high tax states with tax advantages, granted they understand the risks with these types of investments, says Gaymon.
After all, they would get tax-deferred growth and potential tax deductions on the contributions, depending on whether they were contributing to a traditional or Roth 401(k).
The downsides of private assets in 401(k)s
Still, just like with everything in life, there are pros and cons. On the con side, having access to private assets will likely cost more. Plus, there are liquidity concerns.
“Some of these investments are not as liquid as regular stocks. Private investments have longer hold periods, and when retirees do need money, will they have the ability to make withdrawals?” says Gaymon. When adding it to the asset mix, it will need to be planned with care, she says.
Then there’s the quality aspect. If private assets become a popular way to invest in 401(k)s, Radgowski worries there will be a dearth of quality vehicles to invest in. He says there could be a scarcity of quality, which could increase the risk for 401(k) investors.
Leveling the playing field shouldn’t come at a cost
The Trump administration is focused on providing investors with more access, making it easier to invest in private assets and cryptocurrency via defined contribution plans, which could bring more diversification and potentially better returns. Like anything else, there are risks and rewards to that approach.
Investors have to do their part to ensure they understand those risks, and the industry has to do its part to ensure they have investors' best interests in mind.
“It's really important to couple more access with a firm focus on fiduciary responsibility and the best interest of the client,” says Radgowski. “If those two things are not fully aligned in lock step… it will be massively detrimental to their ability to save and retire comfortably.”
Related content
-
Don’t Miss Apple and Walmart Back-to-School Tax-Free Holiday Savings this SummerSales Tax Select states host sales tax holidays during the summer. Here’s what you can purchase.
-
The Rule of Retirement InversionThe rule of retirement inversion says that to have a great retirement, you must ask yourself what would ruin a great retirement — and then plan to avoid it.
-
The Rule of Retirement Inversion
The rule of retirement inversion says that to have a great retirement, you must ask yourself what would ruin a great retirement — and then plan to avoid it.
-
The Five Best Side Hustles for RetireesMore older people are working in retirement to boost income and stave off boredom. These gigs and hustles make the most sense for the golden years crowd.
-
Sibling Bonds May Wax and Wane: Here's How To Safeguard ThemSibling Bonds May Wax and Wane: Here's How To Safeguard Them
-
How Divorced Retirees Can Maximize Their Social Security Benefits: A Case StudySusan discovered several years after she filed for Social Security that she is eligible to receive benefits based on her ex-spouse's earnings record. This case study explains how her new benefits are calculated and what her steps are to claim some of the money she missed.
-
I'm an Investment Pro: Here's How Alternatives Could Inject Stability and Growth Into Your PortfolioAlternative investments can often avoid the impact of volatility, counterbalancing the ups and downs of stocks and bonds during times of market stress.
-
Retirement in the Age of Cyber Scams: How To Protect Your Next ChapterRetirement is meant to be a time of relaxation and living life on your terms. But for many retirees, this dream is under threat from a growing epidemic — cyber scams.
-
Even Stars Need Health Care: What Venus Williams' Story Tells Us About Retirement PlanningDon't let health insurance costs force you back into the game. Start planning now to ensure your early retirement is forever.
-
Humana to Cut Prior Authorizations for Medicare Advantage Plans by 2026Humana, the second-largest provider of Medicare Advantage Plans, has pledged to streamline the often frustrating Prior Authorization process.
