Today President Trump signed an Executive Order entitled, Democratizing Access to Alternative Assets for 401(K) Investors (“the EO”), which directs the U.S. Securities and Exchange Commission and the Department of Labor to facilitate access to alternative investments – such as private equity, real estate, commodities, lifetime income and cryptocurrency/digital assets investments – through employer-based retirement savings plans such as a 401(k). It is important to remember that this EO is merely a first step and does not shift the legal duties applicable to retirement plan fiduciaries immediately.
Background
Retirement plans that permit individuals to direct their own investments within a plan line-up of preselected alternatives represent a huge pool of assets. Allowing private equity and other alternative investments, such as cryptocurrency, to be offered within 401(k) retirement plans has long been of interest to many. Retirement plans have a roster of investment options available for participant use in directing their accounts, which can include a “brokerage window” permitting access to a less closely monitored suite of investments. To date, the few participant-directed retirement plans that allow private equity or cryptocurrency investments have limited access to these alternative investments through a brokerage window for fear of fiduciary liability associated with alternative assets.
Fears about alternative investments have arisen from the general duties of prudence and loyalty applicable to fiduciary decisions, bolstered by conflicting guidance issued under the first Trump administration and the Biden administration. Additionally, inquiries from Sen. Elizabeth Warren (D-Mass.) about risks associated with offering cryptocurrency in retirement plans have drawn attention to the issue in recent months.
What Now?
Assuaging these fears has been viewed as necessary in order to gain access to and placement on the traditional retirement plan investment menu, which is where the majority of retirement accounts invest. This latest Executive Order is critical of the impact litigation has had on investment innovation. Placing a private equity fund or cryptocurrency directly onto a 401(k) plan line-up or embedding these investments into a target date fund would open a much larger universe of potential investors.
Whether this EO results in executive agency guidance that sufficiently addresses the fears of the retirement plan fiduciary with decision-making power remains to be seen. Private equity managers and investment providers have been gearing up to offer these types of alternative investments if and when there is purchaser.
For questions about the fiduciary considerations applicable to offering these alternative investments in retirement plans, please contact Allie Itami, or your regular Lathrop GPM attorney.