On August 7th, President Trump signed an executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors.” While this order does not immediately make alternative investments available to all participants in defined contribution plans, it initiates a comprehensive review of which asset classes may eventually be permitted within employer-sponsored retirement plans.
Under the order, the Secretary of Labor has 180 days to review the Department of Labor’s (DOL) existing guidance and clarify its official stance on allowing alternative investments in asset allocation funds. The Secretary must also establish clear criteria to help fiduciaries evaluate whether such investments can justify their typically higher expenses through long-term net returns and improved diversification.
Secretary of Labor Lori Chavez noted, “Instead of allowing Washington bureaucrats to call the shots, we believe plan fiduciaries should decide which retirement investment options are best for hardworking Americans.”
Today, approximately 90 million Americans participate in employer-sponsored defined contribution plans, most of which currently exclude alternative investments. If these new asset classes are approved, private equity sponsors, real estate funds, infrastructure funds, and digital asset managers could gain access to a pool exceeding $13 trillion in retirement assets.
The executive order directs regulators to review a range of potential asset classes, including: Private markets (private equity and private credit), Real estate investments, Digital assets, Commodities, Infrastructure projects, and Longevity risk-sharing pools.
Historically, these opportunities have been available only to pension funds, endowments, accredited investors, and other large institutional investors. While the review encompasses various asset types, most analysts anticipate that only private equity, private credit, and digital assets will be realistically available to defined contribution plans in the near term.
Understanding Private Equity and Private Credit
Private Equity
Private equity firms invest directly in companies, often through leveraged buyouts (purchasing a controlling stake in established businesses) or venture capital (backing early-stage, high-growth firms). Their objective is to enhance operations, increase profitability, and eventually exit the investment through a sale or IPO at a higher valuation.
Private Credit
Private credit funds act as non-bank lenders, raising capital from investors to provide loans to companies that may not qualify for traditional bank financing. These might include distressed firms, high-growth businesses, or those carrying significant leverage. Because these loans carry more risk, investors are compensated with higher yields, though that comes with a greater chance of default.
Fees and Fund Structures
Investors in private funds are required to fulfill capital commitments, pledging a set amount to the fund, which managers can draw down over time through capital calls as investment opportunities arise.
Unlike traditional mutual funds or ETFs, which have seen significant drops in management fees (often below 0.50%, and sometimes as low as 0.04%), private market funds maintain much higher fee structures. The standard “2 and 20” model typically applies: a 2% annual management fee, with a 20% performance fee on profits exceeding a defined hurdle rate (usually around 6-8%). The hurdle rate acts as a benchmark return. For example, if the fund has an 8% hurdle rate with a 20% performance fee, and it achieves 11% returns over the given time, management will take an additional 0.6% (20% x 3%) of the invested capital.
The above example would be a hard hurdle rate, meaning performance fees are charged only to returns above the threshold. Others use a hard hurdle rate, applying the fee to all profits once the hurdle is met.
Digital Assets
The executive order does not yet specify which types of digital assets might be eligible for inclusion in 401(k) plans. Historically, the DOL has urged fiduciaries to exercise “extreme care” when considering cryptocurrencies in employer-sponsored plans, citing the volatility and valuation challenges associated with these assets. However, the current Secretary of Labor has described that earlier stance as an “overeach,” suggesting that these decisions should rest with plan fiduciaries and individual investors rather than federal regulators.
Final Thoughts
Allowing access to private equity, private credit, and digital assets in 401(k) plans could expand diversification opportunities that were previously reserved for institutions and ultra-high-net-worth investors. However, these benefits must be weighed against higher fees, limited liquidity, and increased complexity and risk.
As fiduciaries and plan sponsors navigate upcoming guidance, participants should remain informed, ask thoughtful questions about how new investment options align with their long-term retirement goals, and avoid being influenced solely by the appeal of exclusivity.
