To give alternative asset managers a larger portion of the trillions of dollars in retirement savings held by Americans, U.S. President Donald Trump signed an executive order on Thursday that would permit more private equity, real estate, cryptocurrency, and other alternative assets in 401(k) retirement accounts.
Critics cautioned that the investments were intrinsically riskier, lacked the same level of transparency, and had higher costs than typical retirement investments. At the same time, the White House claimed that regulatory overreach and lawsuit concerns had prevented retirees from enjoying potentially higher returns.
“My Administration will relieve the regulatory burdens and litigation risk that impede American workers’ retirement accounts from achieving the competitive returns and asset diversification necessary to secure a dignified, comfortable retirement,” the order read.
It instructed the Securities and Exchange Commission and the Secretary of Labor to facilitate investors’ access to alternative assets in defined contribution retirement plans.
It instructed the agencies to explain or maybe update regulations that could assist in safeguarding the sector from lawsuit risk. Still, it did not specifically request that they add further legal protections for investors.
Asset managers hailed the news as a significant step toward modernizing retirement savings.
Jaime Magyera, head of retirement for top asset manager BlackRock, stated in a press release that “extending access to investments long out of reach will help ensure millions of Americans build stronger, more diversified portfolios designed to increase savings and address the practical considerations of DC plan fiduciaries.” The statement was directed at defined-contribution plans such as 401(k)s.
The action may benefit large alternative asset managers such as Apollo Global Management, KKR, and Blackstone by allowing them to invest in the $12 trillion market for all defined-contribution plans, of which 401(k)s are the most popular.
Asset managers who oversee those plans have already partnered with some of those companies. According to a Blackstone representative, the company applauded the ruling.
Next year, BlackRock, which has pushed the Trump administration to expand asset options, will introduce its retirement fund with private credit and private equity assets.
Younger savers may benefit from potentially larger returns on riskier investments in funds that become more conservative as they approach retirement, according to proponents.
“The asset manager side has never had access to this $12 trillion retirement market before.
“There are a lot of opportunities for them,” Jason Kephart, an analyst at Morningstar, stated.
“From the individual investor standpoint, though, that’s where it’s less clear after all the additional fees, the additional complexity, and less transparency,” Kephart said.
Compared to the publicly traded equities and bonds that the majority of retirement funds rely on, the new investment choices have lower disclosure requirements. They are typically harder to sell quickly for cash.
Additionally, investing in them typically entails greater expenses.
Employees contribute to their retirement account under defined contribution plans, often with a matching contribution from their employer.
Although the employee owns the invested money, there is no assurance of a consistent payout upon retirement, in contrast to a defined benefit pension plan.
PERKS AND BENEFITS
After three years of high interest rates upending their traditional business model of purchasing companies and then selling them for a profit, many private equity firms are desperate for a fresh source of funding that individual investors may provide.
According to private equity insiders, Trump’s move is unlikely to have an immediate effect.
Attorneys for plaintiffs are already getting ready for potential lawsuits brought by investors who are unaware of the complexities of the new investment types.
In a recent call with analysts, BlackRock CEO Larry Fink acknowledged that asset managers are facing difficulties as a result of the shift.
However, the truth is that there is a significant risk of litigation.
“The defined contribution business has a lot of problems,” Fink stated.
“And this is why the analytics and data are going to be so imperative way beyond just the inclusion.”
Before entering the market, the industry might pursue lawsuit reform, according to CFO Martin Small.
Though few took advantage of it out of concern for legal action, the Department of Labor provided instructions under Trump’s previous presidency on how such plans might participate in private equity funds within specific bounds.
Trump’s latest move to embrace digital assets would be to make it easier for 401(k)s to include cryptocurrency.
This could benefit the industry, particularly asset managers that run cryptocurrency exchange-traded funds, including BlackRock and Fidelity.
“Bitcoin is gradually making its way into many investors’ long-term investment strategies, having transcended its initial days as a purely speculative asset,” stated Gerry O’Shea, head of global market analysis at Hashdex Asset Management.
“This EO will help accelerate this trend.”
In a June letter, Democratic Senator Elizabeth Warren questioned the CEO of Empower Retirement.
This annuity provider that manages $1.8 trillion in assets for over 19 million investors is concerned about how retirement funds invested in private investments could be protected, “given the sector’s weak investor protections, its lack of transparency, expensive management fees, and unsubstantiated claims of high returns.”
