jakiro
author:Antoine Gara, Jamie John, Eric Platt
Recently, Donald Trump has opened the door to trillions of dollars in new investments from retired American savers for the private equity and cryptocurrency industry, which could reshape the financial future of 90 million Americans and accelerate growth for asset management companies and digital currency groups.
But the order that allows the 401k savings plan to invest in a range of alternative assets also puts U.S. retirees at new risks.
The move comes after strong lobbying from private capital groups such as Apollo Global Management and BlackRock Group, which believe joining the retirement plan is a way to attract hundreds of billions of dollars in lucrative assets.
The measure is expected to enable pension funds to invest in a range of unlisted investments, from corporate acquisitions and private loans to infrastructure transactions.This may put them at higher costs and lower transparency.Of the $9 trillion assets held in these 401k plans, some may be directed to assets that are difficult to value and sell, unlike traditional stocks and bonds that currently make up the vast majority of retirement plans.
“The door to alternative investments is more open than ever,” said Sean McGee, head of global asset management at KPMG audit division, adding: “Many leaders will see this as an opportunity for a business model.”
Benjamin Sflyn, director of securities policy at Better Markets, warned that the move was a “bad thing” for 401k plan holders.“Retail investors will face a completely different asset type that they may not necessarily realize,” he said.
The acquisition group has been working hard to sell trillions of dollars in investment and bring returns to investors.This prompted pension funds and foundations to retreat from the industry, cutting off important cash sources.Large private capital groups such as BlackRock instead place their future growth on managing the savings of retirees and wealthy individuals.
Wall Street successfully convinced Trump to sign the order, which would provide important political and legal safeguards for the industry as they hope to convince the managers of the 401k program to include their funds in their investment plans.According to their financial disclosures, Apollo, Carlyle and BlackRock conducted strong lobbying activities.
Other groups, such as BlackRock, work through industry associations.
Some of the industry’s most influential leaders — including Apollo chief Mark Rowan — publicly supported the effort.
Luo Wen and his peers publicly stated that 401k depositors who do not enter the private equity market will miss the potential for diversification and high returns.
“We are basically betting on Nvidia’s retirement system,” Rowan said in February, referring to the high concentration of 401k savings on index funds dominated by a few tech stocks.This week, he reiterated his call for private investment by opening the 401k market, calling it “common sense.”
According to people familiar with the matter, the Defined Contribution Alternatives Association, a powerful lobby group favored by many large private equity groups, even claimed in Washington that the 401k plan could be due to failure to provideHigher returns to the transaction were sued.
Carlyle CEO Harvey Schwartz said the order “was long overdue” because “rich customers have long been able to enter this field.”
BlackRock said adding private investment to retirement plans would “ensure millions of Americans build stronger, more diverse portfolios.”
At the White House, Trump’s National Economic Commission and Economic Advisory Commission act as liaisons between the private capital industry and the president, according to an official.The office of Deputy Chief of Staff Stephen Miller assisted in drafting the order.
A senior adviser said the government’s interest in cryptocurrencies played a role in submitting the order to the president’s desk, noting its popularity in the White House.
Trump has made the deregulation of digital assets a central issue in his administration and believes the industry has helped him win the 2024 presidential election.Entities controlled by the Trump family have also recently invested billions of dollars in cryptocurrencies.
Some in the private equity industry worry that the order would link their funds to newer, more speculative cryptocurrencies, especially as the 401k plan suffers a terrible loss from digital asset investments.But according to people familiar with the matter, they think it is an acceptable trade-off.
While there is no explicit provision for the prohibition on investing in alternative assets, 401k plan managers have been cautious about investing in these assets.Most managers are concerned about facing employee lawsuits for investing in these funds, both because of the high fees of these funds and because of the higher leverage adopted by many strategies.
“These litigation costs are high, there are many settlement cases, but there are very few cases of plaintiffs winning in court,” said Rajib Chanda, partner at Simpson Thacher & Bartlett. He added that this concern “has a huge chilling effect regardless of the basis of the litigation.”
Trump directed administration agencies to facilitate 401k program managers to make it easier to provide private investment, partly including joining clauses aimed at curbing litigation against private investment strategies.
“The only special interest that guides President Trump’s decisions is the best interest of the American people,” said White House Deputy Press Secretary Kush Desay.
“The president’s historic executive order fulfills his promise to make America rich again by democratizing, modernizing and expanding retirement investment options for ordinary Americans.”
The focus now turns to the Department of Labor, which oversees and enforces the 1974 law, which sets standards for companies that provide 401k benefits.
Asset management companies are racing to prepare 401k products to welcome the Ministry of Labor guidance expected to be released in the next six months.Many companies have announced partnerships that will offer private investments in target date funds, with professionals selecting assets for decades of retirement plans.These funds will be a mix of investments in publicly traded stocks and bonds as well as more opaque private assets.
Others offer private investment channels more directly, but require companies to provide advisory services to 401k participants who want to invest.
Empower, the second largest retirement plan provider in the United States, said in May that it will work with Apollo, Goldman Sachs Asset Management and Partners Group to provide private asset investment channels for retirement plans.
A month later, BlackRock Group said it would provide a target date fund for 401k investment provider Great Gray Trust with a mixed public and private investment.In addition, BlackRock Group is developing its own target date fund containing private assets.
Other partnerships have emerged.BlackRock Group has established a “strategic alliance” with Vanguard and Wellington Management to create a public-private mixed fund for retirees, while KKR and Capital Group are exploring the creation of model portfolios and target date funds across the public-private sector.
Michael Pedroni, a former Treasury official and now operating policy consulting group Highland Global, said the “big question” about how much extra fees American families are willing to pay for access to private assets remains unresolved, which are more expensive to identify and manage and therefore more expensive.
“At present, Americans are used to paying 30 to 50 basis points for their 401k. If the fee goes up to 80 basis points, are they willing to pay?”
