The United States government on 30 March proposed rules to liberalise retirement plans (i.e. 401(k) accounts) to include alternative assets such as cryptocurrencies and private equity. This is aimed at easing longstanding barriers to incorporating these less liquid and less transparent assets into American retirement plans, the US Department of Labor said in its statement.
The announcement comes after US President signed an executive order to this effect last year which cleared the way for alternative asset management firms to tap a large new source of capital, as per a Reuters report.
Industry groups have argued private investments can enhance long-term returns and diversification for retirement savers, while skeptics warn higher fees, complexity and limited liquidity could limit those gains and pose risks for retail investors, the report noted.
Some private market funds that are already available to wealthier individual investors have shown signs of strain in recent months. Private credit funds known as business development companies have seen a wave of withdrawals.
‘Mindful of protecting retirement assets’, says Bessent
Treasury Secretary Scott said the proposed rule was “an initial step” and aimed to be “mindful of the importance of protecting retirement assets.”
The guidance lays out how plan trustees, who have a legal fiduciary duty to act in the best interest of members, can incorporate these assets.
They would have to “objectively, thoroughly, and analytically consider, and make determinations on factors including performance, fees, liquidity, valuation, performance benchmarks, and complexity,” the DOL said.
Trustees who abide by them will be granted safe harbor that protects them from lawsuits, it added. The agreed earlier this year to hear one such case filed in 2019 by a former Intel employee claiming trustees made “imprudent” decisions by investing in hedge funds and private equity funds.
A Labor Department official said the rule was not telling providers how to invest and was not shaped by market moves.
“We’re giving them the toolkit so that they can follow an analytical, thorough and objective process,” the official said.
Industry applauds move
Alternative asset managers such as , KKR, and Apollo Global Management could benefit from the chance to draw on the new pool of capital. Their shares gained following the announcement.
The world’s largest asset manager, , which counts more than half its $14 trillion in assets under management as linked to retirement, is among many industry members and groups to applaud the move.
“The President’s Executive Order is a thoughtful step toward addressing the growing retirement crisis,” said Apollo CEO Marc Rowan. “Americans increasingly lack the savings and income needed for a secure retirement,” he said, adding the proposed rule can “meaningfully improve retirement outcomes.”
The Department of Labor will open a 60-day comment period for the rule before deciding whether to finalize it.
“‘ ability to participate more fully in innovation and economic growth through well-diversified long-term investments is a vitally important priority for effective retirement planning,” said Paul Atkins, chair of the U.S. Securities and Exchange Commission.
Even if the rule is adopted, it “will not open the floodgates for private equity, private credit or crypto funds to move into the retirement space,” but only provide a process, said Erin Cho, a partner at law firm Mayer Brown.
Senator Elizabeth Warren, a Democrat from Massachusetts, criticized the proposed rule, saying it would expose to risky assets at a time when prices are falling and cracks are emerging.
Some skeptics welcomed the fact that the length of the proposed rule, which spans more than 160 pages, shows its authors wrestled with questions such as high fees.
“That is good to see, although it would have been even better if they had devoted some time to the recent market problems with valuations and liquidity,” said Henry Hu, professor of finance at the University of Texas at Austin’s School of Law.
John Toomey, CEO of the $147 billion private equity firm HarbourVest, told Reuters the new rule comes down to basic good practice.
“It’s all really about: did you follow the right process? Did you have the right information? Did you take the decision with the interests of the individuals front and center?”
(With inputs from Reuters)
