On Thursday, Donald Trump enacted an executive order that permits the inclusion of cryptocurrencies and alternative assets, such as private equity and real estate, in 401(k) retirement portfolios. This development paves the way for fund managers to access a significant pool of American retirement savings, potentially opening up the $12 trillion market of defined contribution plans to alternative investments. While this move could greatly benefit large asset managers, critics raise concerns regarding the inherent risks associated with such speculative investments.
Trump, previously sceptical of cryptocurrencies, has shifted his stance, promoting crypto as part of his administration’s strategy. His order aims to alleviate regulatory restrictions that he claims hinder the capacity of retirement accounts to achieve competitive returns and diversify assets. He argued that excessive regulation and opportunistic litigation have suppressed investment innovation, calling for reforms to enhance the retirement sector.
Despite the possible benefits of increased investment options, analysts express apprehension about the volatility and susceptibility to fraud within the cryptocurrency market. Anil Khurana from Georgetown University highlighted that, while the idea of allowing alternative assets in the 401(k) sector has merit, the speculative nature of these investments could pose serious risks to retirement savings.
Alongside this directive, Trump signed another order addressing claims of “debanking” against conservatives, suggesting that banks have denied services based on political beliefs. The 401(k) order mandates collaboration between the Department of Labor and other regulatory bodies to consider necessary changes, although the actual implementation may take time.
Alternative assets typically entail lower disclosure requirements and are harder to liquidate compared to stocks and bonds, which are commonly used in retirement funds. The transition could also incur higher fees and expose retirees to fluctuating markets. Defined contribution plans allow employees to contribute to their retirement accounts, usually supplemented by employer contributions, but without guaranteed payouts upon retirement, unlike traditional pension plans.
The world’s largest asset manager, BlackRock, has voiced its intent to establish a retirement fund incorporating alternative investments, acknowledging, however, that immediate gains for the industry are uncertain, given the complexities and litigation risks involved. Previous guidance from the Department of Labor during Trump’s prior presidency allowed limited investment in private equity, but uptake was minimal due to fears of legal repercussions.
Supporters argue that such investment options could yield higher returns for younger savers, who could then transition to more conservative strategies as retirement nears. However, prominent voices like Senator Elizabeth Warren have raised alarms about the risks and lack of transparency in private investments, seeking assurances on the protection of retirement savings in this evolving landscape.