What is 401(k) Plan? Exploring the Expansion to Alternative Assets You Need to Know

What is a 401(k) Plan? An Overview

A 401(k) plan is a retirement savings account offered by employers to help employees prepare for their financial future. Named after the section of the Internal Revenue Code that governs it, this plan allows participants to contribute a portion of their salary on a pre-tax basis. Many employers incentivize saving by offering matching contributions. These funds are typically invested in a variety of traditional assets, such as stocks, bonds, and mutual funds, with the goal of growing over time.

Expansion of Alternative Assets in 401(k) Plans

On August 7, 2025, President Donald Trump issued an executive order aimed at expanding access to alternative assets within 401(k) plans. This groundbreaking initiative seeks to democratize retirement savings by enabling investors to diversify their portfolios with private equity, real estate, cryptocurrency, and other private market investments. Historically, these asset classes have been restricted in retirement accounts due to regulatory constraints and litigation risks.

Why Include Alternative Assets?

Alternative assets offer several potential benefits, including:

• Diversification: Reducing reliance on traditional stocks and bonds.

• Higher Returns: Certain alternative investments, such as private equity, have historically outperformed public markets.

• Mainstream Adoption: The inclusion of digital assets like Bitcoin could mark a milestone for cryptocurrency adoption.

However, these benefits come with risks, including illiquidity, higher fees, and lack of transparency. Fiduciaries must carefully evaluate these factors before offering alternative assets.

Regulatory Overreach and Litigation Risks in Retirement Plans

One of the key motivations behind the executive order is addressing regulatory overreach and the "litigation fear factor" that discourages fiduciaries from offering alternative assets. Fiduciaries often avoid these investments due to concerns about lawsuits, even when they could provide long-term benefits to retirement savers.

Role of Fiduciaries Under ERISA

Under the Employee Retirement Income Security Act (ERISA), fiduciaries are required to act in the best interests of plan participants. The executive order emphasizes the importance of fiduciaries carefully vetting private offerings and balancing higher expenses against potential returns and diversification benefits. Key responsibilities include:

• Conducting thorough due diligence on alternative assets.

• Ensuring compliance with ERISA’s fiduciary standards.

• Educating participants about the risks and benefits of these investments.

Potential Benefits and Risks of Alternative Assets

Benefits

1. Diversification: Alternative assets can reduce portfolio volatility by spreading risk across different asset classes.

2. Potential for Higher Returns: Private equity and real estate have historically delivered strong performance over the long term.

3. Crypto Adoption: Including digital assets in 401(k) plans could channel significant capital into cryptocurrency markets.

Risks

1. Illiquidity: Many alternative assets are not easily sold, making them less flexible for retirement savers.

2. Higher Fees: Management fees for private equity and real estate investments can be significantly higher than traditional assets.

3. Volatility: Cryptocurrencies, in particular, are known for their price swings, which could lead to irreversible losses for less-informed investors.

Target-Date Funds and Asset Allocation Funds as Vehicles for Alternative Investments

Target-date funds and asset allocation funds are expected to be the primary vehicles for incorporating alternative assets into 401(k) plans. These funds are managed by third parties and offer diversified investment options tailored to the participant’s retirement timeline. By including alternative assets in these funds, fiduciaries can provide exposure to private markets while mitigating risks through professional management.

Department of Labor and SEC Regulatory Changes

The executive order tasks the Department of Labor (DOL) with reexamining its guidance on alternative assets in retirement plans within 180 days. This could involve rescinding prior restrictive statements and clarifying fiduciary duties under ERISA. Additionally, the Securities and Exchange Commission (SEC) is directed to explore changes to accredited investor and qualified purchaser status to facilitate broader access to private market investments.

Historical Context of DOL Guidance

The DOL has historically been cautious about allowing alternative assets in retirement plans. For example, previous guidance under the Biden administration limited the inclusion of private equity in 401(k) plans due to concerns about fiduciary risks. The Trump-era executive order represents a significant shift, aiming to open up these opportunities to a wider audience.

Consumer Protection and Financial Education for Retirement Savers

As alternative assets become more accessible, consumer protection and financial education will play a critical role. Retirement savers must understand the risks and rewards associated with these investments to make informed decisions. Key areas of focus include:

• Transparency: Ensuring participants have access to clear information about fees, risks, and performance.

• Education: Providing resources to help savers evaluate whether alternative assets align with their financial goals.

• Regulation: Implementing safeguards to protect less-informed investors from significant losses.

Conclusion

The expansion of alternative assets in 401(k) plans represents a transformative shift in retirement savings. While the potential for diversification and higher returns is promising, fiduciaries and regulators must carefully balance these benefits against the risks of illiquidity, higher fees, and volatility. As the Department of Labor and SEC work to clarify guidelines and broaden access, retirement savers should stay informed and consider their individual financial goals when evaluating these new opportunities.