In a significant move for retirement savers, the White House has issued an executive order in 2025 aimed at expanding access to alternative investments in 401(k) plans. This directive opens the door for ordinary investors to consider options such as cryptocurrencies and private equity. However, financial professionals are cautioning that these alternatives introduce a level of risk that many investors may not fully comprehend.
New Risks in Retirement Portfolios
Investment experts are expressing concerns about the implications of this new order. According to Christopher Bailey, director of retirement at Cerulli Associates, “This is brand new; none of it has been stress-tested yet” in the context of market downturns or prolonged sell-offs. He highlights potential liquidity issues and the complexity surrounding fees as significant factors for investors to consider.
While proponents of the order, including the Trump administration, argue that investments in private equity and innovative companies such as OpenAI or SpaceX may offer higher returns, critics warn that these investments come with inherent risks. Philitsa Hanson, head of product at Allvue Systems, noted, “I don’t think people are talking enough about the potential for higher fees.” She emphasized that the executive order “raises more questions than answers,” underscoring the need for thoughtful integration of these assets into 401(k) plans.
Understanding Fee Structures
The landscape of private equity investment is traditionally characterized by high fees. The common “2 and 20” fee structure involves managers taking a 2% management fee and 20% of any profits. In stark contrast, mutual funds—comprising the majority of 401(k) assets—average fees of just 0.26%, as reported by the Investment Company Institute. Dmitriy Katsnelson, deputy chief investment officer at Wealthspire Advisors, indicated that the executive order could reverse the trend of lowering fees that has prevailed over recent decades.
As alternative asset managers seek to penetrate the vast market of employer-sponsored retirement plans, they must innovate by providing products with lower fees, enhanced liquidity, and greater transparency. Jason Kephart, an analyst at Morningstar, pointed out that some alternative investment fees are not clearly disclosed and may even be obscured in fine print. He stated, “I have a hard time seeing how plan sponsors are going to get comfortable with that.”
Challenges and Considerations for Investors
Traditionally, retirement investors have enjoyed the ability to monitor their portfolios daily, allowing them to track performance and understand the factors influencing their investments. However, alternative investments like private equity do not provide the same level of transparency. As Hanson noted, “You’re asking systems designed for daily trades to support illiquid and sometimes manually priced assets.” This mismatch necessitates that asset managers and plan sponsors enhance their educational outreach to investors.
Blackstone’s President and COO, Jon Gray, recently advised that private assets may be more suitable for younger investors with a longer time horizon, as opposed to those nearing retirement. The legal risks associated with such investments were highlighted in a case involving Intel, where employees sued over retirement plans that included hedge funds and private equity. Although the lawsuit was dismissed after seven years, it raises questions about the legal protections necessary for asset managers and plan sponsors under the new order.
In conclusion, while the executive order presents an opportunity for diversification in retirement portfolios, it also brings forth significant risks and challenges that investors must navigate carefully. The need for transparency, lower fees, and comprehensive education will be paramount as the industry adapts to these changes.
Source: Newsmax
