Should Employers Allow Workers to Invest in Private Equity through their 401(k)s at Trump’s Request?

Among the many upcoming executive orders, there is one that is particularly interesting for both employers and employees. The Trump administration is planning to provide guidance for employers and retirement plan administrators on how they can offer private investments as part of their employees’ 401(k) plans. This move is part of a larger effort to encourage the inclusion of non-traditional investments, such as cryptocurrencies, in retirement plans.

Private equity firms have been eyeing the possibility of tapping into the $12.2 trillion in assets within defined contribution plans. While defined benefit plans have been investing in private equity for years, the use of these investments in defined contribution plans has been limited. Only 2.2% of plan sponsors offered alternative investments in their 401(k) plans as of last year, according to a report from PLANSPONSOR.

The potential for growth and profit in the 401(k) market has enticed private equity firms to push for the inclusion of private investments in retirement plans. Lisa Loesel, a partner at Seyfarth law firm, explained that private equity sponsors are always on the lookout for new sources of capital, and 401(k) plans represent a significant opportunity in that regard.

Some private equity firms have already started offering target-date funds that include private-market investments, with Blue Owl recently announcing a partnership with Voya Financial to offer private market investment products. This trend highlights the growing interest in expanding investment options in retirement plans.

While the move to include private investments in 401(k) plans may open up new opportunities, it also raises fiduciary considerations for employers. The Department of Labor has previously indicated that offering a professionally managed asset allocation fund with a private equity component would not necessarily breach fiduciary duties under ERISA. However, employers will need to engage in a thorough fiduciary process before adding private investment options to their 401(k) plans.

Private-market investments are known for their volatility but also hold the potential for high returns. Employers will need to carefully weigh the risks and benefits of including these investments in their retirement plans. The Trump administration’s decision to lift guidance against the presence of cryptocurrencies in 401(k) accounts earlier this year signals a broader shift towards incorporating alternative investments in retirement plans.

As the 401(k) landscape continues to evolve, employers and plan administrators will need to stay informed about the changing regulatory environment and investment options available to employees. While the potential for growth and diversification in retirement portfolios is enticing, careful consideration and expert advice will be crucial in navigating this new terrain.