President Trump’s Executive Order Eases Regulations for 401(k)s to Include Private Equity Investments, Potentially Expanding Retirement Savings Diversification

In a significant move, President Trump signed an executive order on Thursday aimed at streamlining regulations for 401(k)s and other workplace retirement plans. The order seeks to facilitate the option for employees to invest a portion of their savings in alternative assets such as private equity, real estate, commodities, and digital assets.

The directive aims to “alleviate regulatory burdens and litigation risk,” enabling employers sponsoring retirement plans to offer investment opportunities that they deem relevant to participants. The order instructs the Labor Department to reevaluate its guidance on a fiduciary’s duties under the Employee Retirement Income Security Act of 1974 (ERISA).

The department is tasked with clarifying its stance on alternative assets and identifying criteria for fiduciaries to prudently balance potential higher expenses against the objectives of seeking long-term net returns and broader diversification of investments. The Securities and Exchange Commission (SEC) has been directed to make it easier for participants in workplace plans to access alternative assets.

The private equity and credit industry have been pushing for access to the over $12 trillion market in defined-contribution workplace savings plans, although there is no law prohibiting plan sponsors from offering private market investments to employees. However, these investments have traditionally been perceived as riskier, more expensive, less transparent, and less liquid than publicly traded stock and bond funds.

While the executive order won’t immediately change policy, it will provide a clearer stance for the government on the matter. The new rules, once drafted, will require employers to conduct their own due diligence about the new investment offerings. Lisa Gomez, former assistant secretary of labor for employee benefits security at the Labor Department, advises sponsors to engage counsel and fiduciary advisers with private equity experience to help them evaluate these new options.

Employers should request detailed presentations on fees, investment strategy, and performance from multiple companies marketing new private market products. Sponsors should consider how a new private investment option may perform relative to similar products previously available only to institutional and high-net-worth investors.

Gomez cautions against dismissing the idea of private equity due to higher costs or other factors. However, she stresses the importance of considering potential downsides. “Be careful not to get caught in the hype. But we also shouldn’t be afraid. We should learn,” she said.

The proponents of indirect exposure to private markets argue that it will provide greater diversification globally due to the significant growth of the private market relative to the public market in recent years. With roughly 25 times more individual firms in the private equity market than in the publicly traded one, opportunities for public market investors have become limited.

However, given the extensive due diligence required, most workplace plan retirement savers may not have access to private market options immediately. Some may not see any changes at all.

The debate over how to structure average retail investors’ access to private equity and private debt while maintaining ERISA safeguards is expected to continue. Sen. Elizabeth Warren has expressed skepticism and concerns, seeking more information from Empower, a large recordkeeper planning to offer its 401(k) clients a private equity option as early as the next quarter.

Broader concerns include the potential systemic risk the private credit market may pose to the US financial system and economy. Warren has requested analyses from the Financial Stability Oversight Council and the Office of Financial Research on these matters. The Council was also asked to conduct a stress test of nonbank financial institutions engaged in private credit activities.