President Donald Trump recently signed an executive order that could change the investment options available in 401(k) retirement savings plans. The order aims to allow Americans to invest their retirement savings in alternative assets such as private equity, cryptocurrency, and real estate. Advocates argue that these private market assets can bring diversification and the chance for higher returns to investment portfolios.
Robert Brokamp, a financial planning expert at The Motley Fool, notes that “Everyday Americans can invest in a broader menu of companies.”
However, critics warn that the complexity, illiquidity, and high fees associated with these investments may make them unsuitable for many investors. Private equity firms typically collect a 2% management fee plus 20% of the profit, compared to the average exchange-traded fund which carries a 0.51% annual management fee. Financial advisors are concerned that 401(k) investors may lack the knowledge or experience needed to incorporate these sophisticated and costly investments into their portfolios.
Charles Massimo, a financial advisor and senior vice president at Wealth Enhancement, said, “When you have an unsophisticated investor that doesn’t even understand the difference between a stock and a bond, and now all of a sudden you introduce the allure of getting rich in the private equity markets. You’re only asking for trouble.”
Experts also question the quality of private assets that could be offered to retirement investors. Massimo noted that major private asset players might reserve the best deals for their highest clients, leaving less desirable deals for less informed investors.
Investing in private assets risks
While the inclusion of private assets in 401(k) plans offers potential diversification and higher returns, it also comes with significant risks and costs. Both plan sponsors and investors will require substantial education and clear guidance from regulatory bodies to navigate these complex investment options successfully.
Critics argue that the move could put investors at risk of significant losses. Benjamin Schiffrin, director of securities policy at Better Markets, believes this move might push 401(k) plan managers to begin incorporating private market assets, although many employers may initially be reluctant due to liability concerns. Financial experts caution against the potential risks and advise against such investments without a clear understanding of the risks.
Anh Tran, managing partner at SageMint Wealth, notes that uninformed investors could be particularly vulnerable, especially if their only investment account is their 401(k). It will take months to see any actual changes, and experts stress the importance of education and safeguards to protect investors. Tran urges, “There must be transparency, education, and limits in place to prevent widespread harm.
Otherwise, we could be setting the stage for not only financial loss but also broader economic and social consequences.”