Donald Trump Changing 401(k) Plans: What To Know

President Donald Trump and his administration are finalizing a plan to permit 401(k) retirement savings plans to invest in private assets, according to The Wall Street Journal and Bloomberg, citing individuals with knowledge of the matter.

This would be accomplished through an executive order that instructs the Department of Labor and the Securities and Exchange Commission to guide employers on incorporating investments in things such as stocks and bonds currently not traded on public exchanges.

Why It Matters

Opening up the U.S. pension market—and the 401(k) market, sized at $12 trillion per some estimates—to a wider pool of investments would represent a major shift in the way Americans’ savings are managed. Doing so would also mark a victory for asset managers and the private equity industry, which have long sought and lobbied for access to this broad and historically untapped pool of capital.

Advocates have argued that the move will yield higher returns than the currently conservatively managed retirement investments, while others warn that the potential higher returns may bring with them increased risks.

What To Know

401(k)s are employer-sponsored personal pension accounts, into which employees make pretax contributions that are then matched by employers. These contributions can then be invested in publicly traded securities, and they primarily go toward stocks, bonds and mutual funds.

Private assets, by comparison, comprise those that are not publicly traded on stock exchanges, including private equity, venture capital, real estate and hedge funds.

These have till now been closed off to retirement savings accounts, given the regulatory and fiduciary hurdles investing in them would come with—such as the limited liquidity and higher fees associated with private-market investment products.

In 2020, the first Trump administration released an information letter on this possibility.

“As compared to typical public market investments available in individual account plans, private equity investments tend to involve more complex organizational structures and investment strategies, longer time horizons, and more complex, and typically, higher fees,” the letter said.

However, it also said 401(k)s and other similar retirement plans could invest in these assets without violating federal regulations or the fiduciary duties of those tasked with managing employees’ plans.

“Private equity kind of always gets what it wants in Congress, but I think it’s a bad idea,” Jeffrey Hooke, a part-time professor of finance at the Johns Hopkins Carey Business School, told Business Insider. “It’s illiquid, the fees are very high. Private equity funds, for the most part, don’t beat the stock market.”

Nevertheless, a recent poll of more than 2,000 retirement plan participants by the retirement services provider Empower found that many were in favor of having access to the same investment vehicles as professional investors.

Some 74 percent said incorporating private investments in retirement plans could allow employees to build wealth in a similar manner as the super-wealthy, with 72 percent saying diversification of this kind could improve long-term savings and retirement portfolios.

According to a separate report in the Financial Times, Trump is also planning to open up 401(k)s to investments beyond stocks and bonds, including gold and cryptocurrency.

When approached by Newsweek for comment on these possibilities, a White House spokesperson said the president was “committed to restoring prosperity for everyday Americans and safeguarding their economic future.”

However, they added that no decisions should be considered official “unless they come from President Trump himself.”