The world of finance is changing rapidly, and so is the world of retirement planning. That’s all about to change with recent moves that will upend Americans’ savings. President Donald Trump’s executive order is the most visible initiative at the center of these changes. This order aims to open up the investment universe available to 401(k) plans. Most notably, it would begin to open the door to assets like private equity and cryptocurrency. BlockchainShock dives into what this development means for everyday retirement savers. It introduces industry, labor, and environmental perspectives and gives an unvarnished look at the benefits and harms that could result.
Changes to 401(k) Plans Under the Executive Order
Overview of the Executive Order
President Trump's executive order is designed to alleviate regulatory burdens and reduce litigation risks that currently hinder American workers' retirement accounts from achieving competitive returns and asset diversification. The main focus of the bill is on giving savers more options and more ways to boost their retirement savings. The administration’s order lifts norms and restrictions on non-traditional investments. These previously excluded assets are no longer outside the traditional scope of 401(k) plans.
Key Modifications to Investment Options
If successfully implemented, this executive order would be transformative to the investment landscape. This has the potential to open up cryptocurrency and other alternative assets, such as private equity and real estate, to retirement accounts like 401(k)s. Today, most 401(k) plans only allow for stocks, bonds, and mutual funds. This shift could lead to a monumental reconfiguration of the investment terrain for retirement investors. This opens access to many asset classes that had only been available to institutional investors and high-net-worth individuals. This major change raises many significant questions. We should be focused on the risk, cost and whether these kinds of investments are appropriate for the typical saver.
Timeline for Implementation of Changes
Expected Dates for New Regulations
Though the executive order certainly lays the groundwork for change, when exactly this change might be implemented is still unclear. Private equity executives told us that any major changes forced by Trump’s order are not going to take effect overnight. The challenge is a long one, with layers of regulatory review, new guideline development and 401(k) plan administrator fine-tuning. Ultimately, it will be very important for retirement savers to know that these changes will take place slowly over time.
Factors Influencing the Timeline
A number of factors may impact how quickly these changes are made. Regulatory agencies should assess the risks of allowing alternative assets in 401(k) plans and create safeguards to protect investors. Retirement plan administrators will need some time to determine if they are able to provide these new investment choices. They are required to inform participants of the risks and benefits associated with participation. Beyond these procedural factors, market conditions, political developments, and legal challenges are likely to impact the timeline.
Assessing the Risks of Alternative Investments
Understanding Investment Risks
One of the primary concerns surrounding the inclusion of alternative assets in 401(k) plans is the level of risk involved. Cryptocurrency, and especially cryptoassets, are highly speculative and volatile. Although this provides for tremendous upside, it poses an equally large downside risk. Private equity—though less volatile than crypto—is still highly risky, exposing investors to issues with liquidity, transparency and valuation.
Comparison with Traditional Investments
Traditional investments such as stocks and bonds are inherently less risky than alternative investments. They have a longer historical track record, are more heavily regulated, and are easier to value. Yet they have lower potential returns than many other possible investments. Retirement savers need to be able to constantly evaluate the risks and rewards of each investment choice available. This smart deliberation will allow them to make well-founded choices. That’s why financial advisors are going to be so critical as more people enter this workforce, guiding them in determining their risk tolerance and making the best choices.
Performance of Alternative Investments vs. Traditional Assets
Historical Performance Data
Advocates for including private market investments in workplace retirement plans invariably tout their longer-term return advantages. This unique benefit can dramatically compound the long-term growth of retirement savings. In fact, traditionally alternative assets like private equity have bested stocks and bonds historically, over long periods of time. As any good financial advisor will tell you, past performance is not a guarantee of future results. It's important to consider that the performance of alternative investments can vary widely depending on market conditions, investment strategies, and manager skill.
Factors Affecting Investment Returns
There are a number of things that can drive the performance of alternative investments and traditional investments alike. Economic growth, interest rates, inflation and geopolitical events all have the power to affect investment performance. Each asset class—equities, fixed income, real estate and commodities—has unique drivers affecting returns. Liquidity, volatility, and correlation with other assets are huge factors as well. Like with every other type of investment, retirement savers should diversify their portfolios across a wide variety of asset classes to mitigate risk and improve potential returns.
Incorporating Private Equity into 401(k) Plans
Benefits of Private Equity Investments
Here are three key ways private equity investments can provide significant new value to 401(k) plan participants. They can offer access to private companies and industries that are otherwise not available to public market investors, which may offer greater growth prospects. Private equity offers unique and highly valuable diversification benefits. Its performance usually has a weak connection to the overall stock and bond markets.
Potential Drawbacks and Considerations
While the introduction of private equity into 401(k) plans promises many upsides, they come with significant downsides that should give us pause. Perhaps the biggest cause for alarm is the lack of transparency associated with private firms as opposed to their publicly traded counterparts. Private equity firms are not required to disclose as much information about their investments, making it more difficult for investors to assess their value and performance. Moreover, private equity investments are highly illiquid, as they cannot be bought or sold readily. This can create real problems for retirement savers by preventing them from getting their money when they absolutely need it. In addition, the high fees that come with the private equity model can eat away at long-term returns.
Including Cryptocurrency in Your 401(k)
Advantages of Crypto Investments
The idea of including crypto in a 401(k) is a tempting lure to many investors. Advocates argue that cryptocurrency provides farmers with unmatched growth opportunities and access to the fastest growing asset class in history. Many investors see crypto as a hedge against inflation and devaluation of currency. Furthermore, crypto offers a unique diversification advantage, with its performance historically uncorrelated to traditional asset classes.
Challenges and Risks Associated with Crypto
There are a number of unreconciled challenges and risks of allowing crypto in 401(k) plans. Perhaps the greatest cause for concern of all is the extreme volatility in crypto markets. Because the value of many cryptocurrencies can vary widely over very short timeframes, the risk of this type of trading could result in substantial losses for retirement savers. Beyond the market’s volatility, the crypto market is incredibly unregulated, opening it up to fraud and manipulation. The opacity and illiquidity of crypto markets generally makes it difficult, if not impossible, for investors to fully understand their risks.
Anil Khurana, an executive director at Georgetown University’s Baratta Center for Global Business. We applaud his leadership in flagging these risks of injecting speculative and underregulated assets into 401(k) plans. Retirement savers need to hone in on their risk tolerance. It’s just as important to flag the need for professional guidance before hopping into non-traditional assets.
Potential Benefits of Alternative Investments:
- Higher potential returns
- Diversification benefits
- Exposure to new asset classes
Potential Risks of Alternative Investments:
- High fees
- Lack of transparency
- Illiquidity
The addition of alternative assets — like private equity and cryptocurrency — in 401(k) plans would be a big shift. This new direction marks a seismic change for the $36 trillion retirement investment landscape. These assets can provide higher return potential and portfolio diversification. Retirement savers will want to consider the risks and potential upside closely before taking action. Financial advisors can be instrumental in working with people to help them gauge their risk tolerance. They inform their clients to help them understand alternative assets and support better informed decisions that fit into broader long-term financial objectives. The regulatory landscape is changing by the week, and new investment opportunities are always bursting on the scene. To find success in the increasingly complex world of retirement investing, be proactive and open to expert advice.
The inclusion of alternative assets like private equity and cryptocurrency in 401(k) plans represents a significant shift in the retirement investment landscape. While these assets offer the potential for higher returns and diversification benefits, they also come with increased risks and complexities. Retirement savers need to carefully weigh the potential risks and rewards before making any decisions. Financial advisors can play a crucial role in helping individuals assess their risk tolerance, understand the characteristics of alternative assets, and make informed choices that align with their long-term financial goals. As the regulatory landscape evolves and new investment options become available, staying informed and seeking professional guidance will be essential for navigating the changing world of retirement investing.
