Trump Executive Order Paves Way for 401(k)s to Invest in Private Equity, Boosting Diversification and Potential Risks

The Trump administration is poised to issue an executive order this Thursday, potentially opening doors for 401(k) plans and other workplace retirement schemes to provide employees with the opportunity to invest a portion of their savings in alternative assets, such as private equity. Historically, these investments have been limited to institutional and high-net-worth investors.

The executive order directs the Department of Labor (DOL) and Securities and Exchange Commission (SEC) to provide guidance to employers regarding the provision of access to alternative investments within their retirement accounts. According to a senior White House official, this move is a response to the growing interest from the private equity and credit industry to tap into the more than $12 trillion defined-contribution workplace savings market.

While it’s not illegal for plan sponsors to offer private market investments, they have typically shied away due to their fiduciary responsibility to provide a selection of prudent, affordable investment options to participants. To date, private equity and credit options have been characterized by higher risk, increased expense, less transparency, and lower liquidity compared to publicly traded stock and bond funds.

The executive order is expected to clarify the administration’s stance on the matter but won’t immediately change existing policy. Jaret Seiberg, a financial services policy analyst at TD Cowen Washington Research Group, expects that new rules may take until 2026 to be drafted. Once these rules are in place, employers will need to conduct their own due diligence regarding the new investment offerings.

Lisa Gomez, who served as the assistant secretary of labor for employee benefits security at the DOL from October 2022 until January of this year, advises that sponsors seek legal counsel and fiduciary advisers experienced in private equity to help evaluate the new investment options. Employers should request detailed presentations on fees, investment strategy, and performance from multiple companies marketing new private market products.

Gomez suggests that sponsors consider how a new private investment option might perform relative to similar products previously accessible only to institutional and wealthy individual investors. If a new product aims to address cost, transparency, and liquidity concerns for participants in workplace plans governed by the Employer Retirement Income Security Act (ERISA), “will that affect the returns?” Gomez queries.

Gomez cautions against dismissing private equity outright due to higher costs or other factors but also warns against being overly enthusiastic. She recommends a careful and informed approach, learning from both the potential benefits and potential downsides of these new investment opportunities.

Proponents of indirect exposure to private markets argue that it could offer greater diversification given the significant growth of the private market relative to the public market in recent years. With approximately 25 times more individual firms in the private equity market than in the publicly traded one, the growth prospects for public market investors have become more limited, according to Hal Ratner, head of research at Morningstar Investment Management LLC.

However, given the extensive due diligence required, it’s unlikely that most workplace retirement savers will be offered the option to invest in private market options immediately. The discussion surrounding the structuring of average retail investors’ access to private equity and private debt, along with the necessary safeguards under ERISA, is expected to continue.

Senator Elizabeth Warren has expressed skepticism and concerns about this development. As the top-ranking Democrat on the Senate Banking Committee, she has requested more information from Empower, one of the largest recordkeepers planning to offer a private equity option to its 401(k) clients as early as the next quarter. Warren is also concerned about the potential systemic risk the private credit market may pose to the U.S. financial system and economy. She has called for an analysis of the threats posed by nonbank financial companies’ involvement in the private credit market, including private equity and private credit funds, and has requested stress tests on these institutions.