Donald Trump’s executive order opening up 401(k)s to crypto and private equity investments marked an unprecedented change to what can go into Americans’ retirement accounts.
So, should you start loading up these assets if your plan provider offers them, or stick with the traditional mix of stocks and bonds?
It’s not black and white. Only a few years ago, such a proposal would have been unheard of, but some have argued that massive returns in crypto in recent years mean Americans’ retirement funds have missed out. Meanwhile, the boom in private credit has also been an opportunity that non-institutional investors haven’t really been able to access yet.
The counter-argument is that these asset classes are riskier relative to the more staid stock and bond markets, with higher volatility a hallmark of crypto, while private credit is characterized by less transparency and lower liquidity.
Business Insider spoke to industry pros about what to know when. it comes to investing in these assets for retirement.
Who should hold crypto and private equity in their 401(k)s?
Rich Powers, the head of private equity at Vanguard, thinks that the executive order could kick off a new chapter in the retirement industry. From his perspective, opening up a 401(k) to private equity makes the most sense for account holders with a long time horizon still ahead of them.
Powers says the calculus is simple: private market investments often accrue the biggest gains over a longer timeframe.
“If you have a shorter time horizon, or a population that’s in the plan for shorter periods, they may not necessarily be able to capitalize on a benefit from that return improvement,” he told Business Insider.
John Toomey, CEO of private markets firm HarbourVest Partners, agreed, stating that retirement savers with a long-term horizon have the most to gain, and that investors should regard alternatives like private equity the same way they think about traditional markets.
“Following the well-established lessons from the stock and bond markets is what will make private market access work in a retirement context,” Toomey said.
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Others note that private equity and crypto investments are best suited for those willing to devote time to learning about them and actively monitoring the impact on their accounts.
“The people who win in the long term are the ones who keep adjusting, even if their choice is to double down on the basics,” Jason Lee, chief of enterprise at Chime, told Business Insider.
What do investors need to do?
Opening up a 401(k) to alternative assets might have benefits for investors with the proper time horizon who can stomach some risk, but for those who don’t fall into those categories, what’s the best move?
Lee said that plan managers should make sure retirement savers are aware that they will not be forced to open up their 401(k)s to these assets.
“All parties should think of this executive order less as a mandate and more as a menu expansion. You can stick with the ‘classic’ if that’s what fits,” he advised.
Powers also noted that even as the executive order changes the industry, it doesn’t necessarily mean that investors will need to take action to prevent exposure.
“Even though private assets may be in plans in the future, it doesn’t necessarily mean that those plans will only be comprised of options that have private assets,” he said.
Powers added that in many cases, private assets in 401(k)s would likely be more of an exception rather than a rule for investors comfortable with potentially higher risk.