Trump is opening the door to risky \u2018alternative investments\u2019 such as crypto and private equity in 401(k) plans. But employers have had good reasons to keep them out of their plans. <\/p>\n
If you believe Labor Secretary Lori Chavez-DeRemer, American 401(k) accounts are about to get much better. <\/p>\n
Thanks to President Trump\u2019s \u201cbold new vision of a new golden age for America,\u201d Chavez-DeRemer wrote in the Wall Street Journal<\/a> on March 30, her agency is taking steps to open these crucial retirement accounts to a raft of new investment options, such as cryptocurrencies and private equity funds. <\/p>\n Her goal, she wrote, is to \u201cunwind regulatory overreach and litigation abuse that have stifled innovation.\u201d Her instrument is a proposed regulation<\/a> that in effect would provide a safe harbor for plan sponsors \u2014 that is, employers \u2014 to offer those options in their employees\u2019 plans without risking lawsuits or government scrutiny over whether they\u2019re sufficiently prudent for workers to choose. <\/p>\n We have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that I would regard as honest.<\/p>\n \u2014 Warren Buffett (2019)<\/p>\n Notwithstanding Chavez-DeRemer\u2019s assertion that this change would be all to the good for workers, the truth is that she and Trump are acting at the behest of alternative investment promoters, who have long slavered for access to the nearly $14 trillion in assets held in 401(k)s and other such defined contribution retirement plans.<\/p>\n Far be it for me to offer anyone investment advice. But there are a few things that Trump and DeRemer aren\u2019t telling you about these proposed new options. Namely, the dangers they present to unwary small investors. <\/p>\n Get the latest from Michael Hiltzik <\/p>\n Commentary on economics and more from a Pulitzer Prize winner.<\/p>\n By continuing, you agree to our Terms of Service<\/a>, which include arbitration and a class action waiver. You agree that we and our third-party vendors may collect and use your information, including through cookies, pixels and similar technologies, for the purposes set forth in our Privacy Policy<\/a> such as personalizing your experience and ads. <\/p>\n The first clue that something is being hidden appeared in DeRemer\u2019s op-ed, in which she blamed \u201cWashington bureaucrats\u201d and \u201cplaintiff lawyers\u201d for stifling the financial innovation that people supposedly have been clamoring to put in their retirement accounts.<\/p>\n You know who rails against \u201cWashington bureaucrats\u201d and \u201cplaintiff lawyers\u201d? Businesses that are fearful that government regulators and juries will clamp down on their wrongdoing. These critiques are often described as efforts to get government off the backs of the people. What they don\u2019t explain is that once government has climbed off, big business will saddle up. <\/p>\n (As I\u2019ve reported,<\/a> among the businesses that have recently been demonizing plaintiff lawyers is Uber, which is pushing a ballot measure in California that would all but shut the courthouse doors to some passengers injured during Uber rides.)<\/p>\n So let\u2019s examine the unacknowledged issues with \u201cinnovative\u201d alternative investments. Private equity firms are known for buying companies that are either held privately, or are public companies due to be taken private. In many cases, they turn profits for their investors by cutting payrolls and reducing services at their portfolio companies, then draining what\u2019s left until there is nothing left. Cryptocurrencies, as I\u2019ve written, are a scam all their own.<\/p>\n We\u2019ll start with the implicit and explicit rules guiding employers when they decide what investment choices to offer workers in their 401(k)s. <\/p>\n \u201cEmployers are fiduciaries,<\/a> which means they must make decisions about retirement investments that are in their employees\u2019 best interest,\u201d observes Eileen Applebaum of the Center for Economic and Policy Research. \u201cThey must be prudent in curating a menu of retirement plan options for their workers. And they have been successfully sued for lack of prudence by workers whose retirement accounts held high fee, illiquid, risky investments that failed to perform.\u201d <\/p>\n The fiduciary standards are developed in part by government bureaucrats. And the successful lawsuits? They\u2019re brought by plaintiff lawyers.<\/p>\n In 2021, the Biden-era Labor Department warned that most sponsors of 401(k) plans and other defined contribution plans \u201care not likely suited to evaluate the use of [private equity] investments\u201d in those plans. The administration shied away from outlawing such investments outright in 401(k)s. Nevertheless, employers understandably saw the warning as a yellow light, if not a flashing red light. <\/p>\n As of 2024, only about 4% of plan sponsors offered alternative investments, Applebaum reported. The threat of litigation also stayed their hand; 66 lawsuits were filed against plan sponsors that year, according to Encore Financial, a personal finance firm. High fees and other fiduciary failures were at the heart of most of the cases.<\/p>\n This isn\u2019t the first time that Trump has tried to wedge private equity investments into 401(k)s. In 2020, during his first term, then-Labor Secretary Eugene Scalia issued an opinion that the mere presence of private equity investments among 401(k) choice was not in itself a fiduciary violation. <\/p>\n Scalia said his goal was to \u201cremove barriers to the greatest engine of economic prosperity the world has ever known: the innovation, initiative, and drive of the American people.\u201d<\/p>\n Until then, individuals were effectively barred from the investments by a Securities and Exchange Commission rule allowing only \u201caccredited\u201d investors \u2014 those who could show annual income of more than $200,000 or net worth of $1 million or more, not including their homes. <\/p>\n I didn\u2019t offer an opinion then about the wisdom of these investments, but wrote only that<\/a> \u201cif I were inclined to invest my 401(k) money in private equity, I would hope that my family would arrange to have my head examined.\u201d<\/p>\n My reasoning then was that private equity funds produce limited disclosure, or no useful disclosure at all; there are no commonly accepted formulas to measure their returns; and they\u2019re subject to management fees immensely higher than conventional stock, bond or money market funds.<\/p>\n No less an experienced investor than Warren Buffett warned his own shareholders<\/a> away from the sector, I pointed out.<\/p>\n \u201cWe have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that I would regard as honest,\u201d Buffett said at the May 2019 annual meeting of Berkshire Hathaway, which held his corporate investment portfolio. <\/p>\n Since then \u2014 indeed, since the Great Recession of 2007-2009 \u2014 the private equity sector has been promoting itself as a source of financial returns superior than those of conventional stock portfolios while glossing over cavils such as Buffett\u2019s. <\/p>\n The promoters boast that their funds have low correlations with public markets \u2014 that is, when the public markets falter, the private markets gain; that they\u2019re skilled at finding bargains among targeted businesses; and that they impose profit-gaining efficiencies on their acquired businesses.<\/p>\n In recent years, however, the private equity argument has faded. \u201cCurrent data raises questions<\/a> concerning these predicate assumptions,\u201d wrote Nori Gerardo Lietz of Harvard Business School in 2024. Private equity fund performance, she observed, has \u201ceroded materially.\u201d <\/p>\n That\u2019s true. From 2022 through the first three quarters of 2025, according to the research firm MSCI, private equity firms turned in annualized returns of 5.8%, while the Standard & Poor\u2019s 500 index of public firms yielded 11.6%. Institutional investors such as public employee pension funds have begun to ask whether the sector deserves their money. <\/p>\n In the last year, the Yale University endowment and the public employee pension fund of New York City<\/a> have sold off billions of dollars in private equity investments, some at a discount to their stated values. (To be fair, the California Public Employees\u2019 Retirement System, or CalPERS, has remained a fan, attributing its recent improvement in overall returns to a strengthened investment in private equity.)<\/a><\/p>\n The doubts being voiced by these major investors has turbocharged the push by the private equity sector to reach into individual retirement accounts. By some measures, however, individual investors have even less tolerance for some of the features of private equity than do institutions. Unlike publicly traded stocks, these investments are illiquid, meaning they can\u2019t be sold at will and they can\u2019t be reliably priced.<\/p>\n As for crypto, the other major alternative investment being touted by Trump, its shortcomings are well documented. <\/p>\n In contrast to conventional stocks and bonds, they don\u2019t represent stakes in anything concrete and as a result are extremely volatile. <\/p>\n Bitcoin, for instance, ran as high as $126,000 in October; as of Thursday it was priced below $72,000. Among other queasy-induced crashes, bitcoin lost 35% of its value in less than four weeks between mid-January and early February, falling from $96,929 on Jan. 13 to $62,702 on Feb. 4.<\/p>\n These are all factors demanding notice from small investors contemplating adding these sectors to their retirement funds. For that reason, some retirement professionals doubt that even the Trump administration\u2019s favor will persuade many plan sponsors to open their doors to alternative investments. Trump\u2019s regulators may be taking a hands-off approach to these sectors, but plaintiff lawyers aren\u2019t likely to back off. <\/p>\n For individual investors, these are sectors that were made for the phrase \u201ccaveat emptor.\u201d If you don\u2019t know your Latin, it means \u201cbuyer beware.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"Trump is opening the door to risky \u2018alternative investments\u2019 such as crypto and private equity in 401(k) plans.…\n","protected":false},"author":2,"featured_media":576216,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[39],"tags":[5097,28213,65801,28,253271,5013,9319,147,530,253270,253269,3201,253272,7540,3479,724,23250],"class_list":{"0":"post-576215","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-personal-finance","8":"tag-401k","9":"tag-401ks","10":"tag-alternative-investment","11":"tag-business","12":"tag-crucial-retirement-account","13":"tag-employer","14":"tag-investment-advice","15":"tag-personal-finance","16":"tag-personalfinance","17":"tag-plaintiff-lawyer","18":"tag-plan-sponsor","19":"tag-private-equity","20":"tag-private-equity-fund","21":"tag-sector","22":"tag-trump","23":"tag-warren-buffett","24":"tag-worker"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/576215","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=576215"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/576215\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/576216"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=576215"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=576215"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=576215"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}