Let’s put the next SpaceX in our 401(k)s before its launch onto public markets

As Artemis II achieved liftoff for the first moon voyage in more than 50 years, space news also rocked the investment world with the breaking story of SpaceX’s forthcoming IPO. Financial news sites report that SpaceX has filed paperwork with the Securities and Exchange Commission (SEC) to publicly list shares on the US markets in July. With its recent valuation of more than $1 trillion, SpaceX will likely debut as one of the largest IPOs ever.

SpaceX’s rise is worth celebrating. The firm’s ascent is a tribute to brilliant and driven entrepreneurs like Elon Musk, the farsighted venture capitalists who backed it, and (what’s left of) America’s free-market system and creative destruction. Yet the lengthy process leading up to the SpaceX  IPO and the fact that – as I  have noted with other large IPOs of recent years – it is going public only after becoming one of America’s biggest companies illustrates how overregulation through laws like Sarbanes-Oxley and Dodd-Frank has made it harder for investors to build wealth through emerging growth firms.

Another layer of red tape has also limited access for American workers with 401(k)s to private companies like SpaceX during their growth stages. As noted by the Independent Women’s Forum, “outdated regulations and fear of lawsuits have limited investment options, holding workers back and reducing long-term growth.” Specifically, a slew of regulations effectively blocks many 401(k) holders from holding alternative assets, including private companies like SpaceX, during the crucial growth stages in which they greatly increase investor returns.

Fortunately, the Department of Labor (DOL) is attempting to change this through a new proposed rule. This rule stems from an executive order from President Trump tasking the DOL and the SEC with relieving “the regulatory burdens and litigation risk that impede American workers’ retirement accounts from achieving the competitive returns and asset diversification necessary to secure a dignified, comfortable retirement.”

In a previous blog post, I noted the contradiction that even though defined contribution retirement plans such as 401(k)s are reliant on the returns from the workers’ own investment choices, traditional guaranteed-return defined benefit plans often have more choices to invest in alternative assets.  And as I noted, they have increasingly been exercising these choices by investing in private companies and cryptocurrency. As I wrote:

Some of the most respected investment professionals are recommending these assets to boost return and increase diversification in retirement portfolios. Yet because of red tape, many working and middle-class 401(k) holders are out of luck when trying to access them.

The proposed DOL rule would take the first step in changing this regressive red tape by establishing a safe harbor under which a 401(k) plan administrator is not presumed to be in breach of fiduciary duty simply for offering a category of alternative assets to 401(k) participants for one of their holdings. The rule notes that the governing law – the Employee Retirement Income Security Act (ERISA) – “contains no categorical restrictions on investment type.”

The rule then quotes these important remarks by SEC Commissioner Mark Uyeda on the harms of the near-ban of alternative assets to workers holding 401(k)s:

While there might be debate on what is the optimal level of exposure to private investments, what is clear is that the answer is NOT zero. Regulation should not presume that zero percent exposure is inherently safer or preferable. The absence of access is not the same as the presence of protection. A blanket exclusion from defined contribution plans denies both investment professionals and investors alike the ability to make informed choices about risk and reward.

The countdown for liftoff has begun to expand investor choice and potentially raise 401(k) returns by allowing alternative assets entry into their orbit.