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Trump wants employers to let workers invest in private equity through their 401(k)s. Should they?

An upcoming executive order may provide guidance for employers and plan administrators who want to include private-market investment options in 401(k) accounts.

Hand dropping cash into a bucket that says "401k

Francis Scialabba

4 min read

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The Trump administration is set to pave the way for more employers to give workers the option to incorporate private investments into their retirement portfolios.

A forthcoming executive order will instruct the Department of Labor and the Securities and Exchange Commission to develop guidance for employers and retirement plan administrators on how to include these types of assets in 401(k) plans, the Wall Street Journal reported on July 15.

Such a move would be part of a broader push by the administration to encourage the presence of non-traditional investments, such as cryptocurrencies, in retirement plans.

Why private equity wants a piece of the 401(k) pie. While defined benefit plans such as pensions have been investing in private equity for years, these types of investments are much less common in the defined contribution space, said Lisa Loesel, a partner in the employee benefits practice group with law firm Seyfarth. As of last year, just 2.2% of plan sponsors offered any alternative investments in their 401(k) plans, according to a benchmarking report from the trade journal PLANSPONSOR.

The private equity industry has been lobbying to change this, though, seeing a lucrative opportunity in the $12.2 trillion in assets currently held in defined contribution plans, which include 401(k)s.

“The private equity funds and managers themselves, they are always looking for places where they might be able to get an investment of additional capital,” Loesel said. “401(k) plans are a very large source of potential capital, so there is somewhat of a push from the private equity sponsors of the world.”

A handful of private equity firms, including Apollo Global Management and State Street, already offer target-date funds that include private-market investments. The alternative asset manager Blue Owl announced on July 14 it will offer private market investment products through a partnership with Voya Financial.

How this could affect benefits leaders. An information letter issued during President Trump’s first term provides some indication of what this eventual executive order might look like. In that letter, a Department of Labor official said offering a “professionally managed asset allocation fund with a private equity component as a designated investment alternative” would not necessarily constitute a breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA).

“There are a lot of fiduciary considerations with providing an avenue for 401(k) investments in private equity,” Loesel said. “The thinking is this order might help give fiduciaries some comfort in making those investments available by providing some specific avenues and specific procedures that they can follow to help facilitate those investments.”

Loesel added that she doesn’t expect employers to rush to add private investment options to their 401(k) plans as a result of this order. Doing so would require a “robust fiduciary process,” as employers would have to consult with their investment advisors on a number of considerations, such as whether this option would be in the best interest of their participants, and how the fees would compare to the returns they might see.

Private-market investments are more volatile than public stocks, but hold the promise of yielding high returns, Loesel noted.

The administration previously signaled an openness to alternative investments in retirement plans when it lifted guidance that had cautioned against the presence of cryptocurrencies in 401(k) accounts this past May. In an interview with HR Brew at the time, Alicia Munnell, senior advisor with Boston College’s Center for Retirement Research (CRR), expressed concern about the growing presence of private assets in pension plans.

“I haven’t seen anybody demonstrate that if you go off the beaten path, you do really well,” she said. “I’m for sticking with investments that people understand until there’s some indication that there’s real gain to going into more complicated alternatives.”

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