The U.S. Department of Labor’s Employee Benefits Security Administration has proposed a regulation detailing the necessary steps for 401(k) plan managers when considering ‘alternative assets’ in their investment options.
Alternative assets refer to investments that fall outside traditional markets, including: (i) private market investments in non-publicly traded financial instruments; (ii) real estate interests and debt; (iii) managed funds investing in digital assets; (iv) commodities; (v) projects for infrastructure development; and (vi) lifetime income strategies like longevity risk-sharing pools.
Digital assets are a new form of investing that includes a wide variety of assets that can be stored and transmitted digitally, including cryptocurrencies such as Bitcoin and other tokens.
The new rule effectively paves the way for private equity and cryptocurrencies to be added to 401(k) accounts. On the downside, many of these alternative assets are considered to be less liquid and semi-transparent.
Industry groups claim that private market investments can improve long-term returns and diversification for retirement savers, but critics caution that higher fees, complexity, and limited liquidity may hinder these benefits and pose risks for retail investors.
Private market funds accessible to wealthy individual investors are experiencing strain, with private credit funds facing a notable increase in withdrawals recently.
The U.S. Department of Labor’s Employee Benefits Security Administration has issued a historic proposed regulation increasing potential retirement investment options for more than 90 million Americans.
The proposed regulation explains the steps that managers of 401(k) plans should take when considering ‘alternative assets’ as a component in their investment lineups and establishes a set of process-based safe harbors for plan fiduciaries to use when selecting designated investment alternatives.
The proposal follows President Trump’s Executive Order, “Democratizing Access to Alternative Assets for 401(k) Investors.”
The overarching goal of the proposed regulation is to alleviate certain regulatory burdens and litigation risk that interfere with the ability of American workers to achieve, through their retirement accounts, the competitive returns and asset diversification necessary to secure a dignified and comfortable retirement.
Under the proposed rule, when selecting investment alternatives, plan fiduciaries would need to objectively, thoroughly, and analytically consider and make determinations on factors including performance, fees, liquidity, valuation, performance benchmarks, and complexity.
While managers of defined contribution plans have always had the authority to consider alternative assets, historically, almost none have done so.
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