President Donald Trump signed an executive order that aims to allow U.S. citizens to invest their 401(k) retirement savings in cryptocurrency, private equity, and real estate — a move that experts say warrants caution from employers.
Trump’s executive order, signed Aug. 7, directs the U.S. Department of Labor (DOL) and other agencies to re-examine guidance and clarify positions on alternative assets, such as digital currency, within 180 days. It enjoins the DOL to assess guidelines regarding a fiduciary’s duties concerning alternative asset investments in Employee Retirement Income Security Act (ERISA)-governed 401(k) and other defined-contribution plans.
The order followed a May move by the DOL’s Employee Benefits Security Administration to rescind a warning issued under the Biden administration that cautioned 401(k) plan fiduciaries to exercise “extreme care” before adding cryptocurrency to their investment menus.
The DOL praised the action to expand retirement investment options, with U.S. Secretary of Labor Lori Chavez-DeRemer commenting in a statement that “the federal government should not be making retirement investment decisions for hardworking Americans, including decisions regarding alternative assets.”
“The Department of Labor already took action to rescind the Biden [a]dministration’s guidance that disadvantaged crypto investments,” she said. “This executive order further supports our efforts to improve flexibility and eliminate unfair one-size-fits-all approaches, and I applaud President Trump for taking decisive action.”
Some have been calling for more opportunities for retirement savers to invest in a broader range of assets and potentially reap bigger rewards in the process, especially as confidence in retirement savings has stalled in recent years. Among U.S. workers who have retirement savings, 1 in 4 said they have just one year or less of their current annual income put aside for their post-work years, according to a Northwestern Mutual report from earlier this year. About half of those surveyed (51%) said they think it’s somewhat or very likely they will outlive their savings, and 35% said they have not taken any steps to address that possibility. Only 16% of U.S. workers feel confident enough to say the prospect of outliving their wealth is “very unlikely,” Northwestern Mutual found.
A Risky Move?
But others say allowing alternative asset classes, such as crypto, is risky —for both employees and employers.
“Although the order may open a new stream of wealth for retirement savers,” said Richard Clarke, chief insurance officer at Woodcliff Lake, N.J.-based insurance firm Colonial Surety Company, employers that manage retirement accounts “need to wade carefully because they will bear substantial risks.” Under ERISA, he explained, plan sponsors are obligated to act in the best interests of plan participants.
“As private assets become prevalent in 401(k)s, plan sponsors face increased administrative burdens. They will need to focus on educating plan participants about private assets while also having a clear understanding of the higher fee structures associated with private markets and managing those costs appropriately,” he said. “In addition, they will need to navigate a market with loose regulations and reporting obligations, leading to reduced transparency.”
Clarke added that plan sponsors will need to adapt as cryptocurrency becomes increasingly integrated into everyday financial ecosystems. Although “no new investment options come without risks,” cryptocurrency’s lack of transparency, regulatory uncertainty, and potential for cyber hacks make these plans more volatile.
“The fiduciary risks are significant,” he said.
It’s unclear when changes spurred by Trump’s executive order could go into effect. ERISA regulations could create more hurdles as the DOL issues guidance for the new 401(k) changes, and employers would also need time to revise retirement plan options.
It’s also too soon to tell whether employers will take advantage of the new rule, said Julia Zuckerman, vice president of compliance at New York City-based HR consulting firm Segal, as employers will not be required to allow such investment options. “Plan fiduciaries would decide for themselves whether or not to offer these investments. But regardless of the content of the guidance, many plan fiduciaries may assess the risk of participant loss — and corresponding litigation risk — as outweighing the potential benefits of offering alternative investments in the lineup,” she said.
“Employers should wait to see what the guidance provides and then weigh the risks and benefits of offering alternative investment options,” Zuckerman said.
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