Author: Chen Mo
On August 7, 2025, US President Donald Trump signed an executive order allowing 401(k) retirement savings plans to invest in more diversified assets, including private equity, real estate, and, for the first time, crypto assets.
This policy is quite self-explanatory, as it appears on the surface.
It provides "national-level" endorsement for the crypto market, resulting in a massive influx of funds and a new pool of "strategic coin hoarding."
This expands the diversity and returns of pension plans, but also introduces higher volatility and risk.
In the crypto world, this is a historic achievement.
Looking back on the development of 401(k) plans, the key turning point was the pension reform during the Great Depression that allowed stock investments. Despite the different historical and economic contexts, this shift shares many similarities with the current trend toward cryptoasset adoption. 1. The Pension System Before the Great Depression From the early 20th century to the 1920s, US pension plans were primarily based on defined benefit plans (DBPs), where employers promised to provide employees with a stable monthly pension after retirement. This model, stemming from the industrialization of the late 19th century, was designed to attract and retain workers. The investment strategy for pension funds during this period was highly conservative. The prevailing view at the time was that pensions should pursue safety over high returns. Due to "Legal List" regulations, pension funds were primarily limited to low-risk assets such as government bonds, high-quality corporate bonds, and municipal bonds. This conservative approach worked well during economic booms, but it also limited potential returns. 2. The Impact of the Great Depression and the Pension Crisis The Wall Street Crash of October 1929 marked the beginning of the Great Depression. The Dow Jones Industrial Average plummeted nearly 90% from its peak, triggering a global economic collapse. Unemployment soared to 25%, and countless businesses went bankrupt. Although pension funds rarely invested in stocks at the time, the crisis still hit them indirectly. Many employers went bankrupt and were unable to fulfill their pension promises, resulting in pension payments being interrupted or reduced. This raised public doubts about the ability of employers and governments to manage pensions, prompting federal intervention. The Social Security Act of 1935 established a national pension system, but both private and public pensions remained dominated by local governments. Regulators emphasized that pension funds should avoid "gambling" assets such as stocks. The turning point began: The post-crisis economic recovery was slow, and bond yields began to decline (partly due to federal tax expansion), sowing the seeds for subsequent changes. At this point, yields began to fall, failing to cover the promised returns. 3. Investment Shifts and Controversy in the Post-Great Depression Era After the Great Depression, particularly during and after World War II (1940s and 1950s), pension investment strategies began to slowly evolve, shifting from conservative bonds to equity assets, including stocks. This shift was not smooth and was accompanied by intense controversy. Despite the post-war economic recovery, the municipal bond market stagnated, with yields falling to as low as 1.2%, failing to meet pension fund guarantees. Public pension funds faced the pressure of deficit financing, increasing the burden on taxpayers. At the same time, private trusts began adopting the "Prudent Man Rule," a principle rooted in 19th-century trust law that was reinterpreted in the 1940s to allow them to diversify their investments in pursuit of higher returns, as long as the overall approach was "prudent." This rule initially applied to private trusts but gradually began to affect public pension funds. In 1950, New York State was the first to partially adopt the Prudent Man Rule, allowing pension funds to invest up to 35% in equity assets (such as stocks). This marked a shift from a "statutory list" to flexible investment. Other states followed suit, such as North Carolina, which authorized investments in corporate bonds in 1957 and permitted a 10% stock allocation in 1961, increasing it to 15% in 1964. This change sparked significant controversy, with opponents (primarily actuaries and labor unions) arguing that stock investments would repeat the mistakes of the 1929 stock market crash and expose retirement funds to market volatility. The media and politicians called it "gambling with workers' hard-earned money," fearing a collapse of pension funds during an economic downturn. To mitigate the controversy, investment percentages were strictly limited (initially no more than 10-20%), with a preference for "blue-chip stocks." Later, benefiting from the postwar bull market, the controversy gradually faded, proving its potential for returns. By 1960, non-government securities accounted for over 40% of public pension funds. New York State's municipal bond holdings fell from 32.3% in 1955 to 1.7% in 1966. This shift reduced the burden on taxpayers, but also made pension funds more reliant on the market. The Employee Retirement Income Security Act (ERISA) of 1974 applied prudent investor standards to public pension plans. Despite initial controversy, stock investments ultimately gained acceptance, but they also exposed some issues. For example, the devastating losses suffered by pension funds during the 2008 financial crisis reignited similar debates. The current introduction of crypto assets into 401(k)s closely resembles the controversy surrounding the introduction of stocks, both involving a shift from conservative investments to higher-risk assets. Crypto assets are clearly less mature and more volatile at this point, which can be seen as a more radical form of pension reform. This also signals that the promotion, regulation, and education of crypto assets will be further enhanced to foster greater acceptance and awareness of the risks of this emerging asset class. From a market perspective, the inclusion of stocks in pension plans has benefited from the long bull market in the US stock market. To replicate this trend, crypto assets must also operate in a stable, upward market. Furthermore, since 401(k) funds are effectively locked up, pension funds investing in crypto assets is equivalent to "hoarding" coins, creating another "strategic crypto reserve." Regardless of how you interpret it, this is a huge positive for crypto. Appendix 6 - The Meaning and Specific Operational Mechanism of 401(k)s A 401(k) is an employer-sponsored retirement savings plan under Section 401(k) of the United States Internal Revenue Code, first introduced in 1978. It allows employees to contribute pre-tax (or post-tax, depending on the plan) wages to an individual retirement account for long-term savings and investment. A 401(k) is a defined contribution plan. Unlike traditional defined benefit plans, its core principle is that employees and employers contribute jointly, with employees bearing the full cost of investment gains or losses. 6.1 Contributions Employees can deduct a certain percentage of their paycheck (usually 1%-15%) from their individual 401(k) accounts and deposit it into their employer's accounts. Employers offer matching contributions, which means they top up the employee's contributions based on a certain percentage (e.g., 50% or 100%, typically capped at 6% of salary). The matching amount depends on the employer's policies and is optional. 6.2 Investments A 401(k) is not a single fund but rather an individual account controlled by the employee. Funds can be invested in a "menu" of options pre-set by the employer. Common options include S&P 500 index funds, bond funds, and mixed allocation funds. The 2025 Executive Order allows the inclusion of private equity, real estate, and crypto assets. Employees must select an investment portfolio from the menu or accept the default. Employers only provide options and are not responsible for specific investments. Return Ownership: Investment returns belong entirely to the employee and do not need to be shared with the employer or others. Risk Assurance: If the market declines (such as the 2008 financial crisis, when the average 401(k) lost 34.8%), the employee bears the losses personally, with no safety net.
6.3 Withdrawal
Withdrawal before age 59.5 is subject to a 10% penalty and income tax, unless an exception is met.
Withdrawal is mandatory from age 73 onwards, and a penalty will be imposed for failure to withdraw.
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