Trump's directive on broadening 401(k) plans: Which fresh investment avenues may be accessible?

In a move aimed at enhancing retirement savings, President Donald Trump signed an executive order on Thursday, directing financial regulators to include alternative investments in retirement plans like 401(k) funds.

According to Ari Jacobs, global head of investments at Aon, this move has the potential to improve participant outcomes by providing individuals access to a wider range of investments. The executive order will broaden the types of assets available to investors in their 401(k) and other defined-contribution retirement accounts.

The order includes private market investments, direct or indirect real estate interests, commodities, infrastructure projects, digital assets held in actively managed investment vehicles, and longevity risk-sharing pools as alternative assets. Leanna Haakons, financial commentator and president of Black Hawk Financial, states that the change grants access to strategies and asset classes once reserved for institutional investors.

However, the actual availability of the new alternative investment options in plans is unlikely to be widely available until next year due to regulatory processes and guidance that will have to be developed. Investors must contend with liquidity constraints, higher management fees, and the need for financial education and due diligence when participating in the new alternative investment options.

Peter von Lehne, head of investment solutions for Neuberger Berman, believes including private markets in professionally managed retirement products can potentially enhance returns and diversification. A 10% private equity allocation to a target date fund, as suggested by von Lehna, could meaningfully improve the fund's risk-return profile, boosting retirement income.

The Labor Department, Treasury Department, and Securities and Exchange Commission will work together to determine if regulatory changes are needed to carry out the purpose of the order. The industry has made "significant progress in developing these solutions" to meet the needs of defined contribution plans, and investment firms will have to ensure their products are compliant before they roll out to retirement plan sponsors.

Despite the potential benefits, broadening the types of assets that can be held in 401(k) and similar retirement plans offers new investment opportunities but should be approached with caution due to potential volatility. Private market investments, according to von Lehne, are not suitable for every investor due to their illiquidity and complexity, but a professionally managed allocation can help ensure suitability and support stronger long-term outcomes for plan participants.

Digital assets like bitcoin in actively managed investment vehicles will also be available under President Donald Trump's order. The inclusion of these assets underscores the administration's commitment to fostering innovation and diversification in the retirement savings landscape.

As the regulatory process unfolds, it will be interesting to see how the financial industry adapts to these changes and how they ultimately impact the retirement savings of millions of Americans.