The Trump administration is paving the way for working Americans to put their 401(k) retirement savings in riskier alternative investments, from private equity and private credit to real estate and cryptocurrency.
The Labor Department, which oversees workplace retirement plans, proposed a rule on Monday that would make it easier for plan sponsors to incorporate these investments, while lessening the regulatory burden and risks of lawsuits for sponsors. President Trump laid out those twin goals in an executive order last summer.
The rule could steer some of the trillions of dollars held in stock and bond funds into more opaque and higher-risk holdings, like private credit, a market for lending by alternative asset managers that has recently shown signs of strain.
While these investments hadn’t been explicitly prohibited from workplace retirement plans, few employees saw them appear on their investment menus. The first Trump administration had essentially provided a green light on incorporating private equity with guidance in 2020, but that was later clarified by the Biden administration, which took a more cautionary approach to alternative investments.
“Our rule clearly spells out that managers must evaluate any and all potential product offerings by following a prudent process,” Keith Sonderling, the deputy labor secretary, said in a statement. “This proposal is decidedly neutral and refrains from saying that any asset class is any better or worse than other investment types, as the law requires.”
Plan fiduciaries, or the employers or plan administrators entrusted with overseeing the plans, must adhere to a law known as ERISA, which requires them to act solely in the best interests of employees, including choosing prudent investment options.
The proposed rule would allow plan overseers to meet their fiduciary obligations as long as they adhere to a “process-based safe harbor,” which requires them to evaluate investments using six factors, including performance, fees, complexity and liquidity (meaning there’s enough cash on hand for participants’ withdrawals, for example), among others.
“It does not excuse fiduciaries from analysis,” said Bonnie Treichel, a partner at Endeavor Law who works with plan sponsors. “Rather, it provides a road map for conducting the type of prudent evaluation that ERISA has always required.”
The rule is subject to a 60-day comment period, ending June 1, for stakeholders to weigh in; department officials said they aimed to have a final rule issued by the end of the year.
Proponents say adding alternative investments to retirement portfolios can help amp up returns and provide further diversification, but critics have focused on the added risks and opacity of many of these investments, and believe their performance has been exaggerated.
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Dennis Kelleher, chief executive of Better Markets, a nonprofit advocacy group that favors stronger regulations, called the proposal dangerous. “The legal immunity created by this safe harbor will incentivize financial advisers to pitch these toxic products,” he said, “which will become ticking time bombs in tens of millions of retirement accounts.”
Private credit is essentially a shadow lending market outside of big banks and public markets. The firms in it lend money, but they aren’t subject to the rules and regulations that apply to traditional banks. Private equity firms buy stakes in companies that aren’t traded on public stock exchanges, so they, too, avoid public scrutiny, which makes it more difficult for regular investors to fully understand what the investments are worth or how much risk they’re taking on. They also carry higher fees and often require people to hold on to the investments for longer time periods.
“As far as I can see, the only party pushing for private equity in 401(k) plans is the private-equity industry,” said Alicia Munnell, a senior adviser at the Center for Retirement Research at Boston College. “Moreover, private equity comes with numerous negatives, and our studies on the performance of state and local pension plans show that the addition of private equity has not increased the return or reduced the volatility in these plans.”
But one potential argument in favor of private market investment is the declining number of publicly traded stocks, which have essentially halved since the late 1990s, as companies stay private longer and turn to alternatives to banks for financing.
The private credit market, led by players like Blue Owl Capital, Apollo Global Management and Blackstone, has grown rapidly over the past several years. But increased loan losses have given rise to fears that more problems may erupt and trickle through the broader financial system.
The private asset industry has lobbied aggressively to gain access to the $14.2 trillion held by tens of millions of employees in tax-advantaged retirement accounts — or nearly 30 percent of the nearly $50 trillion in retirement assets overall, according to the Investment Company Institute.
The most common investment in workplace retirement plans are stock funds, which hold $3.4 trillion, followed by hybrid funds, with $1.6 trillion; hybrids include popular target-date funds, which are a mix of several stock and bond funds that automatically become more conservative as a worker’s target retirement date approaches.
That’s where alternative investments like private credit and private equity appear most likely to show up — several investment firms have begun designing such products. State Street Global Advisors introduced a target-date vehicle that includes a portfolio of index-based investments as well as a bucket dedicated to alternative investments managed by Apollo, which contains private credit, private equity and real assets, for example.
BlackRock, meanwhile, is working with Great Gray to provide a target-date fund with allocations to private equity and private credit.
Tara Siegel Bernard writes about personal finance for The Times, from saving for college to paying for retirement and everything in between.
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