With millions of workers lacking access to workplace retirement plans, the Labor Department has decided that a more pressing matter is giving Wall Street firms access to a lucrative market — your 401(k).
A proposed rule would encourage the addition of alternative assets, such as private equity, private credit and cryptocurrency, to 401(k) menus.
Companies can already offer these assets. But employers have a fiduciary responsibility to act in the best interest of their workers. And because these sorts of assets are costly and hard to value, many plan sponsors worry about the possibility of legal action from workers.
If finalized, this rule— open for public comment — would add protection against lawsuits. As long as the people managing your 401(k) can demonstrate they’ve checked certain boxes, like reviewing fees, this rule would provide companies with a “safe harbor.” It essentially creates a legal shield that makes it much harder for you to hold your company accountable if they choose to offer riskier investments.
This proposal comes directly from an executive order that President Donald Trump signed in August, instructing the Labor Department to change the rules so that 401(k) plans can include “alternative” investments. It’s a move the administration claims will give regular investors more options.
Trump’s order argued that “burdensome lawsuits” have “denied millions of Americans opportunities to benefit from investment in alternative assets.”
Not for a second do I believe this is a move to help regular investors. Instead, it’s a massive greed grab for Wall Street firms looking to tap into the money workers are trying to save for retirement.
Americans held $14.2 trillion in all employer-based defined contribution retirement plans at the end of the fourth quarter, according to a report released last month by the Investment Company Institute (ICI).
I have talked to hundreds of workers investing in their workplace plans, and I have never, ever heard a single person complain that they didn’t have access to alternative assets. I dare say the overwhelming majority wouldn’t even know what private equity and private credit are, and that’s not shade on their investment prowess. It’s an acknowledgment that investing their money can be complicated.
This push to add complex investments feels like a case of “misplaced priorities,” focusing on Wall Street’s needs while ignoring the struggles of average workers, according to Christine Benz, the director of personal finance and retirement planning for Morningstar and author of “How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.”
The companies behind these alternative investments have lobbied hard to get onto plans, arguing investors could see higher returns than traditional stocks and bonds. But with higher returns come higher risks. Employees are better off in the simple, and yes, boring low-cost index funds.
“It’s a solution in search of a problem,” Benz said in an interview.
In a standard 401(k), you usually have access to low-cost index funds or a target-date fund, both of which are much more suitable for workers. In fact, employers have been expanding their offerings of target-date funds, a sort of set-it-and-forget-it investment designed to reduce investors’ risk automatically as they near retirement.
Plan sponsors have been increasingly shifting to cheaper products, Benz said.
Private asset fees typically range from 1.5 percent to 5 percent, compared with 0.06 percent to 0.60 percent for typical target-date funds, according to Vanguard. The promise is that you pay people more money to make you more money. The higher returns aren’t a guarantee, although it will make fund managers richer by charging you higher fees.
“This proposal seems to take a step backward toward opacity,” according to Benz.
Instead of pursuing high-fee private securities, the focus should be on accessibility and “helping people figure out how to generate sustainable income from their portfolios,” she said.
As Benz pointed out in an online post about this issue, “roughly half of workers don’t have access to a workplace-savings plan for retirement.” Many small businesses still can’t offer them, because they face high administrative costs and lack the corporate muscle to negotiate the lower fees that big companies get for their employees.
We know that people save more when they have access to a workplace retirement plan. Nearly half of all Americans with a 401(k) or similar plan admit they likely wouldn’t save for retirement at all if they didn’t have access to an employer-sponsored plan, according to another ICI report this year.
“The good news is that 401(k)s are typically very slow-moving ships. And in general, even with this safe harbor that the proposal would allow for 401(k) plan sponsors and the people who oversee the plans, they do not want to take risks,” Benz predicted.
I understand the appeal of these investments. It’s the same pitch that promises extraordinary wealth through cryptocurrency. But data from Fidelity Investments show a more realistic reality. The people who become 401(k) millionaires get there by sticking to basic stocks and bonds.
I hope many people weigh in on the proposal before the June deadline. While some firms may opt to add these high-fee investment options, they should tread carefully, or better yet, not at all.
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