President Trump is expected to sign an executive order Thursday that will open the doors for 401(k) retirement investors to stash their savings in private assets.
The directive instructs the Department of Labor and the Securities and Exchange Commission to draft guidance for defined-contribution plans to incorporate private-market investments, including private equity, venture capital, hedge funds, real estate, and possibly gold and crypto.
Backers say the shift offers diversification from plain vanilla stocks and bonds and potential juiced-up returns over time.
All well and good, but they come with red flags for retirement savers.
Read more: Bitcoin, crypto stocks rally ahead of Trump order opening 401(k) plans to alternative assets
Private assets come in a panoply of flavors.
“They all have different returns and risks, and you need to understand those differences,” Lisa A.K. Kirchenbauer, senior adviser and founder of Omega Wealth Management in Arlington, Va., told Yahoo Finance.
If you don’t, don’t invest, Kirchenbauer said: “Peter Lynch, the famous fund manager at Fidelity Magellan, used to talk about ‘own what you know.’ If you don’t know and understand what you are investing in, stick with traditional investments.”
Unlike stocks and bonds, these private assets are less liquid and can’t be easily sold if cash is needed, making them less suitable if you have a shorter time horizon — for example, if you will need to start taking Required Minimum Distributions (RMDs), or you roll over your 401(k) to an IRA when you change jobs.
“You need to understand the liquidity rules, or don’t invest,” Kirchenbauer said. “For someone planning to keep their assets in the same plan for a while, even in retirement, it may make more sense.”
She added that if you decide to invest in private assets, you should consider keeping your allocation to a maximum of 5-10% to start.
BlackRock Chief Executive Officer Larry Fink has taken that idea even further. Instead of a traditional 60/40 split between stocks and bonds, the future standard retirement portfolio may look more like 50/30/20 — stocks, bonds, and private assets like real estate, infrastructure, and private credit, Fink wrote in his annual letter to clients in April.
Fink points out that pension funds have invested in them for decades, but 401(k)s haven’t. “It’s one reason why pensions typically outperform 401(k)s by about 0.5% each year. Half a percent doesn’t sound huge, but it adds up over time,” he wrote.
Private assets are already legal in retirement accounts, Fink wrote, but 401(k) providers who select the investments offered in workplace plans aren’t widely familiar with them.
That’s where the president’s directive comes in, pushing regulators to show them how it’s done.
Even so, it’s a bewildering proposition for many Americans saving for their future.
Many workers these days are in the dark about precisely what they are investing in when they enroll in their employer-provided 401(k) plan and are defaulted into a diversified target-date fund based on their anticipated number of years to retirement.
At Vanguard, for instance, last year more than 8 in 10 of participants in its 401(k) accounts used target-date funds. About two-thirds of all 2024 contributions from the 5 million plan participants went into these funds — an all-time high.
With a target-date retirement fund, you choose the year you’d like to retire and buy a mutual fund with that year in its name (like Target 2044). The fund manager then allocates your investment between stocks and bonds, typically made up of index funds, tweaking that to a more conservative mix as the target date nears.
Many people simply pick the year they’ll reach their full Social Security retirement age as the target-date year. For most of us, that’s 67. If you have a higher risk tolerance, you might go with a later date for a more aggressive mix, meaning a higher exposure to stocks, or an earlier one if you lean conservative.
Read more: What is the retirement age for Social Security, 401(k), and IRA withdrawals?
Fink’s BlackRock (BLK) has already jumped into the arena, recently announcing that it’s launching a target-date fund that will consist of private credit, private equity, and other investments, aiming to increase the annual return by an extra 0.5% — translating to roughly 15% more money in your 401(k) over 40 years.
The fund will be offered by Great Gray Trust, which offers retirement investment options and manages over $210 billion in assets. Empower, the second-largest retirement services provider in the US, has aligned with top-tier private investment fund managers and custodians, including Apollo Global Management (APO) and Goldman Sachs (GS). (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
Empower also plans to offer private equity, credit, and real estate in some of its retirement portfolios later this year, and Voya Financial and alternative asset manager Blue Owl Capital are partnering to create private markets products for defined contribution plans.
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“Historically, private assets have been reserved for ultra-high-net-worth individuals and institutions. 401(k) access democratizes investment in alternatives,” said Cary Carbonaro, a certified financial planner and the author of the new book “Women and Wealth.”
But she stressed caution: “While they may offer higher long-term returns compared to public markets, and some real estate and infrastructure assets may offer better protection against inflation, I am still not sure they are appropriate for regular lay people.”
Private assets can be “locked up for years with limited or no ability to sell early — conflicting with the need for participant flexibility,” she added.
Meanwhile, participants may struggle to understand what they’re investing in or how performance is generated, she said. “There is no requirement to share financial information. It is essentially a black box investment.”
One last caveat: Private equity’s arrival in retirement accounts could potentially push costs higher for investors. That’s after fees in 401(k) plans have come down sharply in recent decades, thanks in large measure to more savers investing in lower-cost index funds.
“Private funds often carry performance fees and other layers of costs, reducing net returns, Carbonaro said.
Most lay people don’t even know about the stocks or bonds they are investing in, and these assets are generally reserved for more sophisticated investors, she said. “It will be interesting to see if the employer or plan fiduciary will take the risk to put these as an option.”
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including the forthcoming “Retirement Bites: A Gen X Guide to Securing Your Financial Future,” “In Control at 50+: How to Succeed in the New World of Work,” and “Never Too Old to Get Rich.” Follow her on Bluesky.
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