Proposed Rule Would Allow Alternative Assets in 401(k)s

A new proposed rule from the Department of Labor (DOL) would make it easier for 401(k) plans to incorporate alternative assets, including cryptocurrency, real estate, and private market investments.

The proposed regulation, released March 30, clarifies the steps that managers of 401(k) plans should take when considering alternative assets as a component in their investment lineups and establishes a set of process-based safe harbors for plan fiduciaries to use when selecting designated investment alternatives. 

“This proposed rule will show how plans can consider products that better reflect the investment landscape as it exists today,” Labor Secretary Lori Chavez-DeRemer said in a statement.

The rule follows President Donald Trump’s executive order last August allowing U.S. citizens to invest their 401(k) retirement savings in cryptocurrency, private equity, and real estate. 

Under the proposed rule from the DOL, when selecting investment alternatives, plan fiduciaries would need to objectively, thoroughly, and analytically consider and make determinations on factors including performance, fees, liquidity, valuation, performance benchmarks, and complexity. 

While managers of defined contribution plans have had the authority to consider alternative assets, most plan sponsors have not done so. In 2022, the Biden administration warned fiduciaries about including cryptocurrency options in 401(k) plans. 

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A Potential Mixed Bag for Employers, Workers

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 last year. 

Paul S. Atkins, Securities and Exchange Commission Chairman, said in a statement that “Americans’ ability to participate more fully in innovation and economic growth through well-diversified long-term investments is a vitally important priority for effective retirement planning.”

Andy Banducci, senior vice president of retirement and compensation policy at the ERISA Industry Committee, a national organization representing large employers, said the proposed rule is “a meaningful and important step … to bring needed clarity and certainty for retirement plan managers selecting the options to be made available to plan participants.”

“Too often, fear of meritless litigation reduces innovation in 401(k) investment offerings — and we applaud the Department’s work to ensure that plan managers will have a framework on which they can rely to evaluate traditional and emerging investment options, including private market alternatives and lifetime income strategies,” Banducci said in a statement.

But others have said allowing alternative asset classes, such as crypto, is risky for both employees and employers.   

Although allowing alternative investments may open a new stream of wealth for retirement savers, Richard Clarke, chief insurance officer at Woodcliff Lake, N.J.-based insurance firm Colonial Surety Company, said last year after Trump’s executive order that 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,” Clarke said. “In addition, they will need to navigate a market with loose regulations and reporting obligations, leading to reduced transparency.”

The proposed rule will undergo additional review, including a 60-day public comment period, before it can be finalized.