Donald Trump this week opened the private equity and cryptocurrency industries to trillions of dollars in new investments from US retirement savers, potentially reshaping the financial future of 90mn Americans and turbocharging the growth of asset managers and digital currency groups.
But the order enabling 401k savings plans to invest in a range of alternative assets also exposes America’s retirees to new risks.
It follows heavy lobbying by private capital groups such as Apollo Global Management and BlackRock, who see access to those retirement plans as a path to drawing in hundreds of billions of dollars in lucrative assets.
The measure is expected to open retirement funds to a new array of unlisted investments, from corporate takeovers and private loans to infrastructure deals. In doing so, it potentially exposes them to higher fees and less transparency. Some of the $9tn held in these 401k plans is likely to be shepherded into assets that are harder to value and sell than the traditional stocks and bonds that today comprise the vast majority of retirement plans.
“The doors to alternatives are opening wider than ever,” said Sean McKee, global head of asset management in KPMG’s audit unit. “Many leaders will see this . . . as a business model opportunity.”
Benjamin Schiffrin, director of securities policy at Better Markets, warned that the move was a “bad thing” for 401k plan holders. “Retail investors are going to be exposed to a completely different type of asset without necessarily realising,” he said.
Buyout groups have struggled to sell trillions of dollars in investments and deliver returns to investors. That has prompted pension funds and endowments to retreat from the sector, cutting off an important source of cash. Larger private capital groups such as Blackstone have instead hitched their future growth to managing the savings of retirees and wealthy individuals.
Wall Street was able to win Trump over on an order that should give the industry important political and legal cover as it looks to convince the managers of 401ks to add their funds as part of investment programmes. Their campaign included a heavy lobbying effort by Apollo, Carlyle and BlackRock, according to their financial disclosures.
Other groups, such as Blackstone, directed their efforts through trade associations.
Some of the industry’s most powerful leaders — including Apollo head Marc Rowan — publicly advocated on behalf of the effort.
In public, Rowan and his peers have argued that 401k savers are missing out on the potential for diversification and high returns without access to private markets.
“We basically have leveraged the retirement system of the country to Nvidia,” Rowan said in February, referring to the high concentration of 401k savings in index funds dominated by a small number of technology stocks. This week, he reiterated his call to open the 401k market up to private investments, saying it was “common sense”.
The Defined Contribution Alternatives Association, an influential lobbying group used by many large PE groups, even argued in Washington that 401k plans could be sued for not offering the higher returns of PE deals, according to people briefed on the matter.
Carlyle chief executive Harvey Schwartz said the order was “long overdue” as “wealthy clients have had access to this space for a long time”.
BlackRock said the addition of private investments to retirement plans would “ensure millions of Americans build stronger, more diversified portfolios”.
In the White House, Trump’s National Economic Council and Council of Economic Advisers acted as point people between the private capital industry and the president, according to one official. The office of deputy chief of staff Stephen Miller helped to draft the order.
The administration’s interest in cryptocurrencies played a role in getting the order to the president’s desk, one top adviser said, noting their popularity in the White House.
Trump has made deregulating digital assets a centrepiece of his administration and credited the industry with helping him win the 2024 presidential election. Entities controlled by Trump’s family have also recently invested billions into cryptocurrencies.
Some in the private equity industry feared the order would associate their funds with newer and more speculative cryptocurrencies, particularly if a 401k plan suffered painful losses on a digital asset investment. But they viewed it as an acceptable trade-off, according to people familiar with their thinking.
While there has not been a rule explicitly precluding investments in alternatives, 401k managers have been reluctant to invest in the assets. Most have feared litigation from workers exposed to the funds, both because of their high fees and the higher leverage many of the strategies employ.
“These lawsuits cost a lot of money, there are a lot of settlements, but there are precious few victories by plaintiffs in the courts,” said Rajib Chanda, a partner at Simpson Thacher & Bartlett. That fear had “a huge chilling impact, regardless of the merit of the claims”, he said.
Trump instructed government agencies to make it easier for 401k plan managers to offer private investments, in part by adding provisions meant to stifle lawsuits over the private strategies.
Recommended
Kush Desai, the White House deputy press secretary, said that “the only special interest guiding President Trump’s decision-making is the best interest of the American people”.
“The president’s historic executive order delivers on his pledge to Make America Wealthy Again by democratising access to alternative asset classes, which modernises and expands everyday Americans’ retirement investment options.”
Attention now turns to the labour department, which oversees and enforces the 1974 law that sets the standards for companies that offer 401k benefits.
Asset managers are racing to have the 401k products readied for guidance from the Department of Labor, which is expected within the next six months. Many have announced partnerships that will offer private investments in target date funds, in which professionals select assets for planned retirements decades from now. Those funds would mix investments in publicly traded stocks and bonds with more opaque private assets.
Others are offering access to private investments more directly, but are requiring companies to provide access to an adviser if a 401k participant seeks to invest.
Empower, the second-largest US retirement plan provider, said in May that it would partner with Apollo, Goldman Sachs Asset Management and Partners Group, among others, to offer retirement plans access to private-asset investments.
A month later, BlackRock said it would provide target date funds that mixed public and private investments to 401k investment provider Great Gray Trust. In addition, BlackRock is working on its own target date funds that will include private assets.
Other partnerships have also emerged. Blackstone has a “strategic alliance” with Vanguard and Wellington Management to create public-private funds for retirees, while KKR and Capital Group are exploring creating model portfolios and target date funds that span the public-private arena.
Michael Pedroni, a former Treasury official who now runs policy advisory group Highland Global, said there was a “big question” over how much extra US households would be willing to pay to access private assets, which cost more to identify and manage and, therefore, attract higher fees.
“Right now, Americans are used to paying 30 to 50 basis points on their 401ks. Let’s say it goes up to 80 basis points, will they be willing to pay that?”
Additional reporting by Amelia Pollard