Trump’s Executive Order Opens Door for Crypto, Real Estate, and Private Equity in 401(k) Investments

Traditional retirement accounts predominantly invest in stocks and bonds, but a recent executive order signed by President Trump aims to broaden the investment landscape for these accounts, including cryptocurrency, real estate, and private equity.

These employer-offered retirement plans allow workers to select from various investment options, typically comprising publicly traded stocks and bonds. The executive order instructs the Department of Labor, Treasury, and Securities and Exchange Commission to facilitate the inclusion of these alternative assets alongside stocks and bonds within such accounts.

Private equity firms are investment companies that acquire businesses or assets, often distressed ones. While some private equity firms have successfully turned around companies, others, like Toys R Us, have ended up laden with debt and filing for bankruptcy.

Historically, private equity investments have been limited to large institutions, such as universities and state pension plans, as well as wealthy individuals. However, the prospect of these investment options being accessible through 401(k)s represents a significant shift.

Lisa Kirchenbauer, founding partner and senior advisor at Omega Wealth Management in Arlington, Virginia, explains, “There is an element of democratization here, with what were once exclusive investments for the wealthy now becoming available to everyone. However, this does not guarantee that you will acquire the same assets that have made others wealthy.”

The suitability of these new investment options depends on the companies or assets included within them, and Kirchenbauer questions whether they will represent the best opportunities, which may continue to be reserved for wealthier investors.

While there is no law prohibiting the inclusion of these assets in 401(k)s, plan managers have previously shied away from including them due to higher risk, complexity, lack of transparency, and high fees associated with private equity investments.

The choice of funds offered is ultimately up to employers, who serve as administrators for 401(k) plans. Under the Employee Retirement Income Security Act (ERISA), employers are required to act in the best interests of their employees as fiduciaries and could face lawsuits if they fail to do so.

The Biden administration had previously warned plan administrators against including cryptocurrency funds within 401(k)s. The Trump administration, however, has shown more enthusiasm for alternative assets, with the Labor Department rescinding the Biden-era guidance in May.

As a result of this executive order, new investment options may become available within your retirement account, although their immediate availability is uncertain. Developing these new funds for the retail market is already underway due to 401(k) investors representing a significant new market for private equity firms and cryptocurrency companies.

Experts caution that these assets may not be suitable for everyone’s 401(k). Private equity investments charge high fees, often 2% as a management fee and 20% of the profits, and investors are typically locked in for extended periods, such as a decade or more. This could create complications for individuals planning to retire or change jobs soon, especially if they want to reallocate their funds.

Jeff Hooke, senior finance lecturer at Johns Hopkins University, states that the fees associated with private equity are too high to make them an ideal choice for typical retirement accounts. “Furthermore,” he adds, “the track record for the last ten or twelve years has been mediocre at best, so I would not recommend it.”

Cryptocurrency, on the other hand, presents its own risks due to volatility and loose regulation.

Kirchenbauer advises that if you are particularly interested in alternative investments and still have several years until retirement, you might consider allocating 5% or 10% of your portfolio to these new assets. Meanwhile, Hooke suggests sticking with the basics: stock and bond index funds. “These offer protection from high fees and a guaranteed return that corresponds to market performance, given the low fees,” he says.

With major indices repeatedly setting records this year, some investors might find that tracking the market is sufficient.