The U.S. Department of Labor has proposed a rule that would make it easier for retirement plan sponsors to include alternative investments — such as private equity, private credit, real estate and cryptocurrency — in workers’ 401(k) plans while reducing regulatory burdens and the threat of lawsuits.
The rule aims to carry out goals that President Donald Trump outlined in an executive order last summer.
Experts say it could shift some of the trillions of dollars now held in stocks and bonds into more opaque and higher-risk holdings, including private credit.
The first Trump administration issued guidance in 2020 that effectively gave a green light to incorporating private equity, but the Biden administration later took a more cautionary approach, The New York Times reported this week.
The proposal would allow plan overseers to meet fiduciary obligations under federal law by following a “process-based safe harbor” and evaluating investments using six factors — including performance, fees, complexity and liquidity.
“Our goal is to deliver on President Trump’s promise for a new golden age by fostering a retirement system that allows more Americans to retire with dignity,” U.S. Secretary of Labor Lori Chavez-DeRemer said in a statement. “This proposed rule will show how plans can consider products that better reflect the investment landscape as it exists today. This greater diversity will drive innovation and result in a major win for American workers, retirees, and their families.”
The rule is subject to a 60-day comment period ending June 1. Proponents say the addition of alternative investments can boost returns and provide diversification — while critics point to added risks and opacity.
Dennis Kelleher, CEO of the nonprofit Better Markets, called the proposal dangerous.
“The legal immunity created by this safe harbor will incentivize financial advisers to pitch these toxic products,” he told the Times. “(Those) will become ticking time bombs in tens of millions of retirement accounts.”
Alicia Munnell, a senior adviser at the Center for Retirement Research at Boston College, questioned the role of outside influence in drafting the proposal.
“As far as I can see, the only party pushing for private equity in 401(k) plans is the private-equity industry,” she said. “Moreover, private equity comes with numerous negatives, and our studies on the performance of state and local pension plans show that the addition of private equity has not increased the return or reduced the volatility in these plans.”
Since taking office, the Trump administration has proposed additional uses and funding avenues for 401(k) plans — including penalty free withdrawals for home down payments and the creation of a retirement savings plan for workers without an employer-sponsored account.
