Trump's New Pension Policy Controversy: Democratizing Investment or Systemic Risk?

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Donald Trump recently opened the door to trillions of dollars in new investment from American retirement savers in the private equity and cryptocurrency industries, which could reshape the financial future of 90 million Americans and accelerate the growth of asset managers and digital currency groups.

But the order, which allows 401k savings plans to invest in a range of alternative assets, also exposes American retirees to new risks. The move follows intense lobbying by private capital groups such as Apollo Global Management and BlackRock, which see membership in these retirement plans as a way to attract hundreds of billions of dollars in lucrative assets. The measure is expected to allow retirement funds to invest in a range of unlisted investments, from corporate acquisitions and private loans to infrastructure deals. This could expose them to higher fees and less transparency. Some of the $9 trillion in assets held in these 401(k) plans could be directed into assets that are difficult to value and sell, unlike the traditional stocks and bonds that currently make up the vast majority of retirement plans. "The door to alternative investments is wider than ever before," said Sean Mackey, global head of asset management at KPMG's audit division. "A lot of leaders will see this as an opportunity for their business models," he added. Benjamin Schifrin, director of securities policy at Better Markets, warned that the move would be "bad news" for 401k plan holders. "Retail investors will be exposed to a completely different asset class, and they won't necessarily realize it," he said. Buyout groups have been struggling to sell trillions of dollars in investments and generate returns for investors. This has prompted pension funds and foundations to retreat from the industry, cutting off a key source of cash. Large private equity groups like BlackRock are pinning their future growth on managing the savings of retirees and wealthy individuals. Wall Street successfully persuaded Trump to sign the order, which will provide important political and legal support to the industry as it hopes to persuade 401(k) plan managers to include their funds in their investment plans. Apollo, Carlyle, and BlackRock have engaged in intense lobbying, according to their financial disclosures. Other groups, like BlackRock, are working through industry associations. Some of the industry's most influential leaders, including Apollo's head, Mark Rowan, have publicly supported the effort. Rowan and his peers have publicly argued that 401k savers who don’t tap into private markets are missing out on the potential for diversification and higher returns. “We’re essentially betting our nation’s retirement system on Nvidia,” Rowan said in February, referring to the high concentration of 401k savings in index funds dominated by a handful of tech stocks. This week, he reiterated his call to open up 401k markets to private investing, calling it “common sense.” The Defined Contribution Alternatives Association, an influential lobbying group favored by many large private equity groups, has even argued in Washington that 401k plans could be sued for not offering higher returns on deals, according to people familiar with the matter. Carlyle Chief Executive Officer Harvey Schwartz said the order was "long overdue" because "wealthy clients have long been able to get into this space."

BlackRock said adding private investments to retirement plans will "ensure that millions of Americans build stronger and more diversified portfolios."

In the White House, Trump's National Economic Council and Council of Economic Advisers served as liaisons between the private capital industry and the president, according to an official. Deputy Chief of Staff Stephen Miller's office helped draft the order.

A senior adviser said the administration's interest in cryptocurrencies played a role in getting the order to the president's desk, noting its popularity in the White House. Trump has made deregulating digital assets a central theme of his administration and credits the industry with helping 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 will tie their funds to newer, more speculative cryptocurrencies, especially given the painful losses 401k plans have suffered from digital asset investments. But they believe this is an acceptable trade-off, according to people familiar with the matter. While there is no explicit ban on investing in alternative assets, 401k plan managers have been cautious about investing in them. Most managers fear facing lawsuits from their employees for investing in these funds, both because of their high fees and the high leverage employed by many of the strategies. “These lawsuits are very costly, there are many settlements, but very few plaintiffs succeed in court,” said Rajib Chanda, a partner at Simpson Thacher & Bartlett, adding that this fear has “a huge chilling effect, regardless of the merits of the lawsuit.” Trump directed government agencies to make it easier for 401k plan managers to offer private investments, in part by including provisions designed to curb lawsuits against private investment strategies.

White House Deputy Press Secretary Kush Desai said: “The only special interest guiding President Trump’s decisions is the best interests of the American people.”

“The President’s historic executive order delivers on his promise to make America rich again by democratizing alternative asset classes, modernizing and expanding retirement investment options for everyday Americans.”

The focus now turns to the Labor Department, which is responsible for overseeing and enforcing the 1974 law that sets standards for companies offering 401(k) benefits.

Asset management firms are racing to prepare 401(k) products for Labor Department guidance expected to be released within the next six months. A number of companies have announced partnerships to offer private investments in target-date funds, where professionals select assets for retirement plans spanning decades. These funds will invest in a mix of publicly traded stocks and bonds and more opaque private assets. Other companies are offering access to private investments more directly, but require the 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 it would partner with Apollo, Goldman Sachs Asset Management, and Partners Group, among others, to provide retirement plans with access to private assets. A month later, BlackRock said it would offer a target-date fund that blends public and private investments to Great Gray Trust, a 401k investment provider. BlackRock is also developing its own target-date fund that incorporates private assets. Other partnerships have emerged. BlackRock has formed a "strategic alliance" with Vanguard and Wellington Management to create blended public-private funds for retirees, while KKR and Capital Group are exploring the creation of model portfolios and target-date funds that span the public and private sectors. Michael Pedroni, a former Treasury official who now runs the policy consulting group Highland Global, said the “big question” remains about how much extra American households are willing to pay to access private assets, which are more expensive to identify and manage and therefore carry higher fees. “Right now, Americans are used to paying 30 to 50 basis points in fees on their 401k. If fees go up to 80 basis points, are they willing to pay that?”