Trump opens the door for private equity and crypto as 401(k) retirement plan options
ADVERTISEMENT There is no immediate change in how people invest part of their work earnings. Federal agencies would need to rewrite rules and regulations to allow the expanded choices, and that would take months or more to complete. But once done, employers could offer a broader array of mutual funds and investments to workers, according to the White House. New plans could invest in alternative assets, particularly private equity, cryptocurrencies and real estate.
The Republican president's order directs the Labour Department and other agencies to redefine what would be considered a qualified asset under 401(k) retirement rules.
Americans' retirement plans are governed by a law known as the Employee Retirement Income Security Act of 1974, better known as ERISA. Employers are required by law to offer retirement options that are in the best interest of their employees, not Wall Street. Most retirement plans for Americans are made up of stock and bond investments, and to a much lesser extent, cash and heavily traded commodities such as gold.Trump's move rewards both the USD 5 trillion private equity industry, which for decades has wanted to compete for a role in retirement plans, and the cryptocurrency industry, whose executives strongly supported Trump's 2024 campaign as they aimed for more mainstream acceptance among Americans.The price of bitcoin was up 2 per cent on Thursday to USD 116,542 and has nearly doubled since Trump was elected.
ADVERTISEMENT Under Democratic President Joe Biden, federal regulators were to treat cryptocurrency investments with "extreme care" because of the extreme volatility of crypto. It is not uncommon for bitcoin, ethereum and other big cryptocurrencies to move up or down 10 per cent in a single day, whereas a 2 per cent or 3 per cent single-day move in the stock market would be considered historic.For cryptocurrency companies, which donated millions to Trump's campaign as well as his inauguration, one goal was to get their industry qualified under ERISA. Coinbase, one of the largest crypto companies in the United States, was also a major donor toward Trump's military parade in Washington this summer. Under Trump, the Securities and Exchange Commission dropped its lawsuit against Coinbase, where the Biden administration said crypto should be treated as a security.
ADVERTISEMENT Crypto is particularly popular among young Americans. While volatile, bitcoin has generally moved upward since it was created by an anonymous programmer nearly 20 years ago."It was inevitable that bitcoin would make its way into American 401(k)'s," said Cory Klippsten, the CEO of Swan Bitcoin. "As fiduciaries realise bitcoin's risk-adjusted upside over the long term, we will see growing allocations, especially from younger, tech-savvy workers who want hard money, not melting ice cubes."
ADVERTISEMENT Private equity firms rely heavily on high-net-worth individuals and state and private pension plans, which have extremely long investment timelines. But having access to Americans' retirement assets would open up a deep pool of cash.
Blackstone CEO Steve Schwarzman has told investors going back to at least 2017 that it was a "dream" of his and the industry to be able to draw upon these retirement assets. Previous administrations, Republican and Democrat, have agreed that private equity investments, which can be riskier, more expensive and less liquid than traditional stock and bond market mutual funds, should not be included in 401(k) plans.
ADVERTISEMENT The average historic annual return on private equity assets going back to 1990 is roughly 13 per cent, net of fees, according to Cambridge Associates. The S&P 500 index has had an approximate annual return, including dividends, of roughly 10.6 per cent in the same period of time. However, private equity assets tend to be locked up for years, because the companies underlying the assets have to be sold on the private market, making them highly illiquid compared to stocks, which can be sold in a day."We look forward to working with the Trump Administration on a thoughtful framework that expands access to alternatives for retirement savers, offering Americans more diversification and investment options with appropriate investor guardrails," said Bryan Corbett, the president and CEO of the Managed Funds Association, which is the trade group for the private equity industry.
Even after the regulations are written, it will take time for major retirement plan companies, such as Fidelity, Vanguard, T Rowe Price, and others, to develop appropriate funds for employers to use. Employers are unlikely to revise their retirement plan options quickly, so it may take several years before crypto and private equity investments become mainstream in an individual's retirement plan.
"While Vanguard has not committed to launching a product for defined contribution plans, Vanguard is dedicated to educating retirement investors to ensure a clear understanding of the opportunities and risks of investing in private assets," the company said in a statement. (AP)
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