President Trump signed an executive order on August 7 supporting the use of alternative investments such as private equity and cryptocurrency in defined contribution retirement plans. Alternative investments have been used in defined benefit pension plans, foundations, and endowments for years, and this order seeks to increase their use in defined contribution plans.
The order directs the DOL, the Department of the Treasury, and the SEC to review guidance associated with alternative investments in retirement plans subject to ERISA. The agencies are directed to revise current regulations and guidance to promote access and encourage the use of alternatives in defined contribution plans. Secretary of Labor Lori Chavez-DeRemer stated ‘the federal government should not be making retirement investment decisions for hardworking Americans, including decisions regarding alternative assets.”
Including private equity in a defined contribution plan will introduce some recordkeeping challenges. These investments are illiquid and are not valued daily like mutual funds. In addition, the management fees and potential investment returns, and risk associated with private equities can be significantly higher. Finally, private equity investments are not subject to the same regulatory oversight and disclosure requirements as publicly traded stocks, potentially limiting access to information used to assess the quality of a given investment.
Proponents believe alternative investments will provide access to increased diversification and the opportunity for higher long-term returns. Initially, access to these investments will likely come as an investment sleeve within a managed portfolio (such as a target date fund or managed account). Adding it as part of a professionally managed product should limit individual participants’ exposure to alternatives and help reduce the liquidity and volatility risks.
Introducing these new investments to DC plans has received increased attention over the past several years. In May, recordkeeper Empower stated its plans to introduce new retirement plan products that will allocate a portion of the fund to alternative investments. In addition, Fidelity is offering access to cryptocurrency investing in both IRAs and employer-sponsored plans. We will likely see a variety of new investment products that may include investments in private equity/debt and cryptocurrency, which would represent a significant change to the investment opportunity set available to defined contribution plan investors.
Multnomah Group is a registered investment adviser registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.