Expansion of Retirement Investment Options
The potential for millions of Americans to include higher-risk investments such as private equity and cryptocurrency in their 401(k) retirement accounts has been highlighted by a recent executive order issued by President Donald Trump. This move could grant these financial sectors access to a massive pool of funds, estimated at trillions of dollars. However, the immediate impact on how individuals invest their work earnings is not expected to be significant.
Federal agencies will need to revise existing rules and regulations to allow for expanded investment choices. This process could take months or even longer to complete. Once finalized, employers may have the option to offer a broader range of mutual funds and investment opportunities to their employees. These new plans could potentially include alternative assets like private equity, cryptocurrencies, and real estate.
The executive order specifically directs the Labor Department and other federal agencies to redefine what qualifies as a suitable asset under 401(k) retirement rules. This redefinition is critical because American retirement plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA). Under this law, employers are required to provide retirement options that are in the best interest of their employees, rather than those that benefit Wall Street.
Currently, most retirement plans in the United States consist primarily of stock and bond investments, with a smaller portion allocated to cash and commodities such as gold. The shift proposed by Trump's executive order could significantly alter this landscape.
Support from Industry Sectors
Trump's decision is seen as a win for both the $5 trillion private equity industry and the cryptocurrency sector. For years, private equity firms have sought a role in retirement plans, while cryptocurrency companies have worked to gain mainstream acceptance among Americans. Notably, many crypto executives supported Trump’s 2024 campaign, aiming to increase the industry's visibility and legitimacy.
The price of Bitcoin surged following the announcement, rising by 2% to $116,542. Since Trump's election, Bitcoin has nearly doubled in value. In contrast, under President Joe Biden, federal regulators approached cryptocurrency investments with caution due to its volatility. Daily price swings of 10% or more are common for major cryptocurrencies, which is far more extreme than the typical 2% or 3% movements seen in the stock market.
Cryptocurrency companies, including Coinbase, made substantial donations to Trump's campaign and his inauguration events. Under Trump, the Securities and Exchange Commission dropped its lawsuit against Coinbase, a decision that signaled a shift in regulatory approach compared to the Biden administration, which had considered treating crypto as a security.
Growing Popularity Among Younger Generations
Crypto has gained particular traction among younger Americans, despite its volatility. Bitcoin, created nearly 20 years ago by an anonymous programmer, has generally shown an upward trend over time. Cory Klippsten, CEO of Swan Bitcoin, remarked that it was inevitable for Bitcoin to enter 401(k) plans. He believes that as fiduciaries recognize Bitcoin's long-term risk-adjusted returns, more allocations will follow, especially among tech-savvy younger workers who seek stable, tangible assets.
Private equity firms, which traditionally rely on high-net-worth individuals and pension plans, see the potential for a vast new source of capital through access to retirement assets. Steve Schwarzman, CEO of Blackstone, has expressed his long-held desire for the industry to tap into these resources. However, previous administrations, both Republican and Democratic, have maintained that private equity investments—known for being riskier, more expensive, and less liquid—should not be included in 401(k) plans.
Historical Performance and Risks
Historically, private equity assets have delivered an average annual return of about 13% since 1990, net of fees, according to Cambridge Associates. This outperforms the S&P 500 index, which has returned approximately 10.6% annually over the same period. However, private equity investments tend to be illiquid, often requiring years to sell the underlying companies, unlike stocks that can be traded daily.
Bryan Corbett, president and CEO of the Managed Funds Association, expressed optimism about the potential for expanded access to alternative investments. He emphasized the importance of creating a thoughtful framework that offers Americans more diversification and investment options with appropriate safeguards.
Implementation Challenges
Even after regulatory changes are implemented, it will take time for major retirement plan providers such as Fidelity, Vanguard, and T. Rowe Price to develop suitable funds for employers. Employers are unlikely to make quick changes to their retirement plan options, so it may take several years before crypto and private equity investments become widely available in individual retirement plans.
Vanguard, one of the largest retirement plan providers, has not yet committed to launching products for defined contribution plans. However, the company remains focused on educating investors about the risks and opportunities associated with private assets.