President Trump deserves credit for issuing an Executive Order last month that will help strengthen and democratize retirement security for every American with a 401(k) plan. Workers are awakening to the fact that they are being denied access to an asset class that for decades has outperformed the stock market; namely alternative assets like private equity and private credit. Today access is limited to the wealthy, institutional investors and defined benefit retirement plan beneficiaries. In other words, George Soros, Harvard professors and the government employees of the California Biodiversity Council benefit from alternative assets while the plumber, cook and auto mechanic do not. This is patently unfair to workers and unwise for our nation.
This situation has occurred because of ill defined fiduciary regulations and guidance coming from the Department of Labor (DOL) which oversees employee retirement plans. Murky legal waters are a trial lawyers' best friend, and they have taken advantage by suing 401(k) plan sponsors early and often. This has discouraged all but a few sponsors from offering more diverse investment options, even as public pension plans, endowments and wealthy family offices have been successfully adding alternative assets for decades.
President Trump’s Executive Order will expand retirement plans’ access to alternative assets by directing the DOL to clarify the fiduciary process for offering these investments, through rulemaking if necessary. Importantly, the order also calls on DOL to prioritize actions that curb litigation against plan sponsors. DOL should achieve this by creating a legal safe harbor through a formal notice and comment rulemaking that protects plan sponsors.
The issue of retirement security is hugely important. Baby Boomers are turning 65 at record rates and life spans are increasing. During the Biden Administration inflation soared more than 20% hammering the real incomes of retirees. Given our nation’s fiscal challenges, it could happen again. Furthermore, Social Security is on schedule to become insolvent by 2033 at which time Congress will likely raise payroll taxes, cut benefits or both. This leads to one inescapable conclusion: working Americans will need to rely even more on their 401(k)’s for retirement security.
Alternative assets, specifically private equity, can help ensure retirement security. According to multiple studies using multiple data sets, private equity has yielded superior returns to public markets over the last 5,10, 20 and 25-year timespans. In one recent study, when matched against a public benchmark of comparable assets private equity returned a 10.7% annualized net return from 2000-2024 versus 6.6% for the benchmark.
Asset diversification is another concern. Since the 1990’s the number of public companies has declined by 40% and the ones that do go public are going public later in their growth cycles. Private companies now make up 87% of all US companies with greater than $100 million in revenues. The most popular passive index fund, the S&P 500, no longer offers the diversification it once did. The so called “Magnificent Seven” tech stocks now comprise one third its value and accounted for more than half its returns last year. Without access to alternative investments, 401(k) owners face a shrinking number of investment options, less diversification and likely lower returns.
Most opponents of the Administration’s initiative come from the ideological Left, which attacks it for, “helping the rich get richer.” Ironically, one of the reasons the rich get richer is because they have access to alternative investments. Some critics raise the issue of liquidity. As a long-term retirement vehicle though, 401(k)’s are already illiquid by design since excepting emergency withdrawals or the payment of a huge penalty, beneficiaries cannot access their funds until age 59 ½.
Members of the nanny state also believe that alternative assets are too risky for the unenlightened masses. It’s arguably far riskier to place your entire investment account in only two publicly traded stocks or a triple leveraged ETF, yet Americans are free to do so. In managing risk, 401(k) beneficiaries have at least one fiduciary looking out for their interests, the plan sponsor, and since roughly 90% of plans employ an independent investment advisor, most beneficiaries have at least two. Add in the fiduciary duty of the fund manager and that makes three. Furthermore, one of the great mitigators of risk is investing along side a proven vetted investment manager who has skin in the game. On average half of a private equity fund is the fund manager’s own money. Again, if alternatives are so risky why have public pension funds increased their allocation to them from an average of 10% twenty years ago to an average of 25% today?
The public policy question is not whether 401(k) beneficiaries must or should allocate a portion of their retirement accounts to alternative investments, but given that it is their money, may they? Fortunately, President Trump says yes, and this is good news for millions of Americans.
