Key Takeaways
- • The U.S. Department of Labor released a proposed rule that would open 401(k) and other defined contribution plans to alternative investments such as private equity, private credit, private real estate, commodities and digital assets, according to the Chattanooga Times Free Press.
- • The action followed an executive order signed by the president in August and is viewed as a long-sought win for large asset managers including BlackRock and Apollo Global, which stand to gain access to the roughly $14 trillion retirement plan market.
- • The rule's proposal includes six criteria plan sponsors must evaluate, including risk, fees, complexity and liquidity, with the stated aim of providing a safe harbor for sponsors that document due diligence.
- • The article's author, Christopher A. Hopkins, CFA, co-founder of Apogee Wealth Partners, argues alternatives are costlier, less liquid and more opaque, and that litigation risk will likely keep most employers from adopting them near term.
Summary
The U.S. Department of Labor has released a proposed rule that would allow defined contribution plans, such as 401(k)s, to include alternative investments typically available only to more experienced investors with sufficient capital to absorb losses. The announcement, made in response to an executive order signed by the president in August, is seen as a significant development for large asset managers such as BlackRock and Apollo Global, which have long sought greater access to the roughly $14 trillion retirement plan market and the higher fees alternatives typically generate.
Alternative investments cover asset classes beyond traditional stocks, bonds and funds. The category includes private equity, private credit, private real estate, commodities and digital assets such as cryptocurrencies. These holdings are generally illiquid, may be subject to redemption limits, are valued only periodically, and are often opaque because they are not required to file public financial statements or register with the Securities and Exchange Commission. The article notes that most 401(k) assets are liquid, publicly traded equities and bonds.
Proponents argue that alternatives can improve long-term returns and reduce volatility. The article questions both claims. It states that it is unclear whether private investments outperform public markets after adjusting for illiquidity and leverage, that small 401(k) investors are unlikely to access top-performing managers, and that apparent low volatility is partly illusory because infrequent valuations understate true fluctuations, a phenomenon fund manager Cliff Asness has called "volatility laundering." The article also rejects the comparison with defined benefit pensions, which bear investment risk on the employer and have longer horizons.
The rule's six evaluation criteria are intended to create a safe harbor for plan sponsors that document due diligence, but the article argues this does not eliminate litigation risk under ERISA's fiduciary standard. It notes that much of the progress in reducing excessive 401(k) fees over the past decade has come through litigation, making employers reluctant to adopt complex and costly options in the near term. The author concludes that a diversified portfolio of low-cost, liquid stocks and bonds remains the most appropriate approach for typical retirement savers.
Alternative investments cover asset classes beyond traditional stocks, bonds and funds. The category includes private equity, private credit, private real estate, commodities and digital assets such as cryptocurrencies. These holdings are generally illiquid, may be subject to redemption limits, are valued only periodically, and are often opaque because they are not required to file public financial statements or register with the Securities and Exchange Commission. The article notes that most 401(k) assets are liquid, publicly traded equities and bonds.
Proponents argue that alternatives can improve long-term returns and reduce volatility. The article questions both claims. It states that it is unclear whether private investments outperform public markets after adjusting for illiquidity and leverage, that small 401(k) investors are unlikely to access top-performing managers, and that apparent low volatility is partly illusory because infrequent valuations understate true fluctuations, a phenomenon fund manager Cliff Asness has called "volatility laundering." The article also rejects the comparison with defined benefit pensions, which bear investment risk on the employer and have longer horizons.
The rule's six evaluation criteria are intended to create a safe harbor for plan sponsors that document due diligence, but the article argues this does not eliminate litigation risk under ERISA's fiduciary standard. It notes that much of the progress in reducing excessive 401(k) fees over the past decade has come through litigation, making employers reluctant to adopt complex and costly options in the near term. The author concludes that a diversified portfolio of low-cost, liquid stocks and bonds remains the most appropriate approach for typical retirement savers.
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