On Aug. 7, President Trump signed an executive order intended to expand retirement plan investments into “alternative” assets (described below). This executive order appears to mark a turning point in a campaign for these alternative assets to access the $30 trillion currently accumulated in the private (i.e., non-governmental) U.S. retirement system.  

Background

The Employee Retirement Income Security Act of 1974 (ERISA) imposes broad fiduciary responsibility on those responsible for retirement plan investment decisions—including personal liability for individual fiduciaries. These fiduciary responsibilities represent a very high standard of conduct, and plaintiffs’ attorneys are more than eager to bring lawsuits to hold fiduciaries to account for a wide variety of alleged breaches. In accordance with these fiduciary obligations, retirement plans generally limit investments to mainstream asset classes and investment vehicles, such as mutual funds, collective investment funds, and annuities. This Executive Order seeks to change that.

Covered Alternative Assets

The Executive Order seeks to facilitate retirement plan investments in six categories of alternative assets:

1. private market investments, including direct and indirect interests in equity, debt, or other financial instruments that are not traded on public exchanges;
2. direct and indirect interests in real estate, including debt instruments secured by direct or indirect interests in real estate;
3. holdings in actively managed investment vehicles that are investing in digital assets;
4. direct and indirect investments in commodities;
5. direct and indirect interests in projects financing infrastructure development; and
6. lifetime income investment strategies, including longevity risk-sharing pools.

This list covers a vast array of investments, with two classes meriting special attention. The first category (and perhaps the broadest) would cover investments directly into privately held companies and privately issued credit, as well as investments in funds that hold such assets, such as private equity funds and hedge funds. The other key category (“digital assets”) includes crypto. 

Executive Order Directive

The Executive Order directs three specific actions:

• Within 180 days of the date of the order, the Secretary of Labor shall “reexamine the Department of Labor’s past and present guidance” regarding a fiduciary’s duties under ERISA “in connection with making available to participants an asset allocation fund that includes investments in alternative assets”. 

• Within 180 days of the Order, the Secretary of Labor must review and explain the Department’s guidance on using alternative assets in ERISA plans. This includes issuing guidance on how fiduciaries should weigh the higher costs of these investments against the potential for better long-term returns and greater diversification. The Secretary will also consider new rules—possibly with safe harbors—that spell out fiduciaries’ responsibilities when offering these funds. 

• The SEC shall, in consultation with the Secretary of Labor, “consider ways to facilitate access to investments in alternative assets by participants in participant-directed defined-contribution retirement savings plans.” 

Additional Considerations

The Department of Labor has already started acting on this Executive Order. On August 12 the DOL rescinded a 2021 statement that raised concerns about the use of private equity investments in defined contribution retirement plans. 

We anticipate that the guidance ultimately issued under this Executive Order will bend over backwards to encourage investments in these alternative asset classes. However, regardless of the regulatory guidance issued under this Executive Order, plan fiduciaries will still need to address many challenges before investing in these assets:

• Illiquidity: Many of these assets—private market investments, real estate, infrastructure projects, and certain lifetime income products—cannot be easily sold. Participants may face long lock-up periods or restrictions on withdrawals, limiting flexibility if market or personal conditions change.
• Valuation and Transparency Risk: Private markets, real estate, infrastructure, and digital assets often lack frequent, reliable pricing. This can obscure true value, make performance hard to track, and create vulnerability to mispricing.
• Higher Fees and Costs: Actively managed strategies in private markets, digital assets, and commodities often charge high management and performance fees, which can erode net returns over time.
• Volatility and Loss Potential: Digital assets, commodities, and leveraged private investments can have extreme price swings. Real estate and infrastructure can also suffer from market downturns, economic shifts, or project failures.
• Complexity and Fiduciary Oversight Challenges:
  These assets often require specialized expertise to assess and monitor. For plan fiduciaries, this increases the risk of poor due diligence, compliance failures, and litigation exposure if investments underperform or prove unsuitable for participants.

Plan fiduciaries must also grapple with the realization that this is a political issue—and any favorable guidance could be undone by a future administration. 

The financial sector has been busy developing investment products geared for the retirement market that will, purportedly, address the inherent misalignment between DC plan characteristics and these alternative assets. However, plan fiduciaries will need to proceed with caution to really see how these assets perform in a down cycle — when retiring participants look for distributions. It is only after a few such down cycles that we will be able to assess whether these assets can be structured in a way that is suited for retirement plans. As Warren Buffett reminded us, “a rising tide lifts all boats…only when the tide goes out do you learn who has been swimming naked.”