US President Donald Trump has signed an executive order aimed at democratizing retirement savings by allowing 401(k) plans to invest in alternative investments such as private equity and cryptocurrencies.
The move is expected to shake up the traditional menu of investment choices provided to workers through their employer-sponsored defined-contribution plans. Alternative investments can offer protection from market swings while providing potential for outsized returns, but they also come with higher risks and less transparency.
Experts say that some alternative investments carry higher risk profiles than traditional asset classes and may not be suitable for all investors. It’s unclear whether employers will want to offer such investments given the risks.
The executive order directs the Labor Department to redefine what would be considered a qualified asset under 401(k) retirement rules, allowing workers to invest in alternative strategies outside of traditional stocks and bonds.
However, it’s unclear when these changes can become effective, as it may take months or longer due to complexity. Major retirement plan companies will need time to develop new funds, and employers may need several years to revise their plans.
Experts warn that adoption of alternative investments may be slow due to cost, transparency, and complexity issues. While some investors may be attracted to the potential for outsized gains, they also carry higher costs such as pricier fees for fund managers.
The move has sparked interest in the $5 trillion private equity industry, which may gain access to America’s retirement plans. Cryptocurrencies have grown increasingly popular, with about 1 in 4 people investing in crypto, but their volatility and lack of transparency can be a concern.
Source: https://www.cbsnews.com/news/trump-401k-changes-executive-order-risk-what-to-know