US paves way for private assets to be included in 401(k) retirement plans

By Utkarsh Shetti, Suzanne McGee, Arasu Kannagi Basil and Isla Binnie

March 30 (Reuters) – The Trump administration on Monday issued a long-awaited proposed rule to open up retirement plans to alternative assets, paving the way for private equity and cryptocurrencies to be added to 401(k) accounts. 

The measure, announced by the U.S. Department of Labor, is intended to ease longstanding barriers to incorporating these less liquid and less transparent assets into American retirement plans. It follows an executive order from President Donald Trump last summer and could clear the way for alternative asset management firms to tap a large new source of capital. 

Industry groups have argued private market investments can enhance long-term returns and diversification for retirement savers, while skeptics warn higher fees, complexity and limited liquidity could limit those gains and pose risks for retail investors.

Some private market funds that are already available to wealthier individual investors have shown signs of strain in recent months. Private credit funds known as business development companies have seen a wave of withdrawals.

‘MINDFUL OF PROTECTING RETIREMENT ASSETS’: BESSENT

Treasury Secretary Scott Bessent said the proposed rule was “an initial step” and aimed to be “mindful of the importance of protecting retirement assets.”

The guidance lays out how plan trustees, who have a legal fiduciary duty to act in the best interest of members, can incorporate these assets.

They would have to “objectively, thoroughly, and analytically consider, and make determinations on factors including performance, fees, liquidity, valuation, performance benchmarks, and complexity,” the DOL said. 

Trustees who abide by them will be granted safe harbor that protects them from lawsuits, it added. The Supreme Court agreed earlier this year to hear one such case filed in 2019 by a former Intel employee claiming trustees made “imprudent” decisions by investing in hedge funds and private equity funds. 

A Labor Department official said the rule was not telling providers how to invest and was not shaped by market moves.

“We’re giving them the toolkit so that they can follow an analytical, thorough and objective process,” the official said.

INDUSTRY APPLAUDS

Alternative asset managers such as Blackstone, KKR, and Apollo Global Management could benefit from the chance to draw on the new pool of capital. Their shares gained following the announcement.

The world’s largest asset manager, BlackRock, which counts more than half its $14 trillion in assets under management as linked to retirement, is among many industry members and groups to applaud the move.

“The President’s Executive Order is a thoughtful step toward addressing the growing retirement crisis,” said Apollo CEO Marc Rowan. “Americans increasingly lack the savings and income needed for a secure retirement,” he said, adding the proposed rule can “meaningfully improve retirement outcomes.”

The Department of Labor will open a 60-day comment period for the rule before deciding whether to finalize it.

“Americans’ ability to participate more fully in innovation and economic growth through well-diversified long-term investments is a vitally important priority for effective retirement planning,” said Paul Atkins, chair of the U.S. Securities and Exchange Commission.

Even if the rule is adopted, it “will not open the floodgates for private equity, private credit or crypto funds to move into the retirement space,” but only provide a process, said Erin Cho, a partner at law firm Mayer Brown.

Senator Elizabeth Warren, a Democrat from Massachusetts, criticized the proposed rule, saying it would expose retirement plans to risky assets at a time when prices are falling and cracks are emerging. 

Some skeptics welcomed the fact that the length of the proposed rule, which spans more than 160 pages, shows its authors wrestled with questions such as high fees. 

“That is good to see, although it would have been even better if they had devoted some time to the recent market problems with valuations and liquidity,” said Henry Hu, professor of finance at the University of Texas at Austin’s School of Law.

John Toomey, CEO of the $147 billion private equity firm HarbourVest, told Reuters the new rule comes down to basic good practice.

“It’s all really about: did you follow the right process? Did you have the right information? Did you take the decision with the interests of the individuals front and center?”

(Reporting by Utkarsh Shetti and Arasu Kannagi Basil in Bengaluru and Suzanne McGee and Isla Binnie in New York; Editing by Shinjini Ganguli, Megan Davies, Rod Nickel)