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Trump signs order broadening access for alternative assets in 401(k)s

Cointime Official
  • Proponents say investors will have access to new assets with higher returns
  • Critics warn of increased risk and litigation concerns
  • BlackRock plans new fund with private equity and credit assets

WASHINGTON, Aug 7 (Reuters) - U.S. President Donald Trump signed an executive order on Thursday that aimed to allow more private equity, real estate, cryptocurrency, and other alternative assets in 401(k) retirement accounts – opening the way for alternative asset managers to tap a greater share of trillions of dollars in Americans' retirement savings.

The White House said regulatory overreach and litigation risks have prevented retirees from benefiting from potentially higher returns, while critics warned the investments were inherently riskier, lacked the same disclosures and carried higher fees than traditional retirement investments.

"My Administration will relieve the regulatory burdens and litigation risk that impede American workers’ retirement accounts from achieving the competitive returns and asset diversification necessary to secure a dignified, comfortable retirement," the order said.

It directed the Labor Secretary and Securities and Exchange Commission to make it easier for investors to access alternative assets in their defined contribution retirement plans. It did not expressly ask the agencies to add more legal protections for investments, but directed them to clarify or potentially revise rules that could help shield the industry from litigation risk.

Asset managers welcomed the news, saying it was a major step toward modernizing retirement savings."Expanding access to investments long out of reach will help ensure millions of Americans build stronger, more diversified portfolios designed to increase savings and address the practical considerations of DC plan fiduciaries," Jaime Magyera, head of retirement for leading asset manager BlackRock (BK.N), opens new tabsaid in a statement, referring to defined-contribution plans like 401(k)s.

The move could be a boon for big alternative asset managers such as Blackstone (BX.N), opens new tab, KKR (KKR.N), opens new tab, and Apollo Global Management (APO.N), opens new tab by opening the $12-trillion market for all defined-contribution plans, of which 401(k)s are the most popular, to their investments.

Some of those firms have already struck partnerships with asset managers who run those plans. A Blackstone spokesman said the firm welcomed the decision.  

BlackRock, which lobbied the Trump administration to expand asset options, plans to launch its own retirement fundthat includes private equity and private credit assets next year.

Proponents have argued that younger savers can benefit from potentially higher returns on riskier investments in funds that get more conservative as they approach retirement."

On the asset manager side, it's a $12-trillion retirement market that they have previously not had access to. For them, there's certainly a lot of opportunity," said Morningstar analyst Jason Kephart."

From the individual investor standpoint, though, that's where it's less clear after all the additional fees, the additional complexity, and less transparency," Kephart added.

The new investment options carry lower disclosure requirements and are generally less easy to sell quickly for cash than the publicly traded stocks and bonds that most retirement funds rely on. Investing in them also tends to carry higher fees.

In defined contribution plans, employees make contributions to their own retirement account, frequently with a matching contribution from their employer. The invested funds belong to the employee, but unlike a defined benefit pension plan, there is no guaranteed regular payout upon retirement.

Many private equity firms are hungry for the new source of cash that retail investors could offer after three years in which high interest rates shook their time-honored model of buying companies and selling them at a profit.

Whatever results may come from Trump's order, it likely will not happen overnight, private equity executives say. Plaintiffs' lawyers are already preparing for lawsuits that could be filed by investors who do not understand the complexity of the new forms of investments.

BlackRock CEO Larry Fink acknowledged in a recent call with analysts that the change posed challenges for asset managers.

"The reality is, though, there is a lot of litigation risk. There's a lot of issues related to the defined contribution business," Fink said. "And this is why the analytics and data are going to be so imperative way beyond just the inclusion."

CFO Martin Small said the industry may seek litigation reform before it can expand into the market.

The Department of Labor issued guidance during Trump's previous presidency on how such plans could invest in private equity funds within certain limits, but few took advantage, fearing litigation.

Easing access to cryptocurrencies to be included in 401(k)s would be Trump's latest embrace of digital assets, and could be a potential boon for the sector, including asset managers that operate crypto exchange-traded funds, such as BlackRock and Fidelity.

"Bitcoin has moved beyond its early days as a merely speculative asset and is slowly entering into many investors’ long-term investment strategy," said Gerry O'Shea, head of global market insights at Hashdex Asset Management. "This EO will help accelerate this trend."

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