Trump 401(k) EO helps equalize access to alternative assets

For more than a decade at CEI, I have argued that holders of 401(k)s and other defined-contribution plans should have maximum choice in the investments and investment strategies in these plans. As I testified before the Department of Labor’s (DOL) Employee Benefits Security Administration in 2011, “individual choice is the hallmark of … defined contribution plans, such as 401(k)s.”

While defined-benefit pensions offer a guaranteed amount at retirement, defined-contribution plans provide retirees returns only on the investments they put into the individual plans. Therefore, it is only fair that individuals – working with trusted intermediaries – have maximum say over the investments in their accounts, even if others may deem some of these investments too risky.

Yet ironically, a slew of regulations effectively blocks many 401(k) holders from holding assets that defined-benefit pensions can and do invest in. These include alternative assets such as shares in private companies through private equity and venture capital funds, as well as digital assets like cryptocurrencies.

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.

Fortunately, President Trump recently issued an executive order that will help level the playing field. The August 7 order explains that “a combination of regulatory overreach and encouragement of lawsuits filed by opportunistic trial lawyers has stifled investment innovation and largely relegated 401(k) and other defined-contribution retirement plan participants to asset classes whose returns lack the very same long-term net benefits allowed for and achieved by public pension plans and other institutional investors.” 

The president then declares in the EO that “my administration will relieve 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 directive to both the DOL and the Securities and Exchange Commission, the EO announces that “it is the policy of the United States that every American preparing for retirement should have access to funds that include investments in alternative assets when the relevant plan fiduciary determines that such access provides an appropriate opportunity for plan participants and beneficiaries to enhance the net risk-adjusted returns on their retirement assets.” 

One of the regulations the EO and a research document from the president’s Council of Economic Advisers (CEA) identifies as a barrier to 401(k)s acquiring alternative assets is the SEC’s accredited investor rule. This rule limits investments in many private companies to institutional investors and wealthy or credentialed individual investors. The CEA explains how this rule effectively bars defined-contribution plans – but not defined-benefit plans – from access to investments in private companies.

Given the prohibition on direct access through the accredited investor definition, [defined-benefit] plans typically pool funds from their retail plan participants and invest in private markets as a single institutional accredited investor (or qualified purchaser). In contrast, [defined-contribution] plans may qualify as institutional accredited investors but individual [defined-contribution] plan participants typically do not qualify as accredited investors (or qualified purchasers). Even when the [defined-contribution] plan itself qualifies as an accredited investor, they are still reluctant to directly offer private market investments or pool funds and invest on the plan participants’ behalf.

The EO attempts to fix this problem in part by calling on the SEC to “consider ways to facilitate access to investments in alternative assets by participants in participant-directed defined-contribution retirement savings plans,” adding that “such facilitation may include, but not be limited to, consideration of revisions to existing SEC regulations and guidance relating to accredited investor … status.” A letter sent to the SEC from House Financial Services Committee Chairman French Hill and other members of the committee urged the SEC to take quick action on the EO and “make any necessary revisions to its current regulations and guidance.”

The letter also asked the SEC to review bipartisan legislation in Congress that would liberalize accredited investor rules, giving more Americans access to investments in private companies both inside and outside their 401(k)s. “We are hopeful that such actions will help the 90 million Americans that are currently restricted from investing in alternative assets to secure a dignified, comfortable retirement,” the letter concluded.

For more information on the issue of access to alternative assets for retirement plans, see the compendium of research at retiresafer.org.