The Trump administration’s deregulatory agenda is proceeding slowly but surely, and this week the Labor Department struck a blow for economic freedom. Its new proposed rule would clarify how retirement plans such as 401(k)s can incorporate “alternative investments” such as private capital, real estate, commodities and digital assets in their offerings to workers. If the rule is adopted, it will give Americans greater ability to invest their savings as they choose.
Private capital assets under managementhave grown from $2 trillion in 2008 to $13.7 trillion in 2023 and are expected to rise to $18 trillion by 2027. Many workers would benefit from getting a slice of those returns, but employer-sponsored retirement plans have been slow to catch up.
That’s partly because federal regulations haven’t adapted to the new reality of American financial markets. “Alternative assets” are already relatively common in defined-benefit pensions for government workers, but legal liability rules discourage their inclusion in 401(k)s.
A cottage industry of trial attorneys make a killing suing retirement plan providers. The current regulations leave uncertainty about how alternative assets will be treated in those lawsuits. The Labor Department’s new rule would clarify the regulations so plan providers can expand into alternative investments without fear of meritless lawsuits that are cheaper to settle than to fight.
The current rule was issued in 1979, before cryptocurrencies and other digital assets existed. The proposed rule, which is asset-neutral, would allow plan providers to offer more choices to workers.
Retirement plan providers create premade portfolios consisting of a mix of assets. Workers today might choose a portfolio consisting of 90 percent stocks and 10 percent bonds. Plan providers should also be able to offer a portfolio with (for example) 85 percent stocks, 5 percent bonds, 5 percent private capital and 5 percent real estate. If workers want to stick with just stocks and bonds, they’re free to do that as well under the proposed rule.
Investing all of one’s retirement savings in cryptocurrency or private credit would be a bad idea. But so would investing it all in one stock or small group of stocks. Incorporating more types of assets would allow for more diversification, which is generally considered the soundest saving strategy.
Retirement accounts such as 401(k)s are the property of individuals, not their employer or the government. If outdated government regulations are preventing workers from investing their money how they want, the regulations need to be updated. The Labor Department is offering Americans the chance to gain more of a stake in the entire U.S. economy.
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