The 401(k) Revolution: How Trump's Executive Order Could Usher in a New Era of Alternative Investing

The Trump administration's proposed executive order to open 401(k) retirement plans to private markets—think venture capital, real estate, and private equity—could be the most seismic shift in retirement investing since the 401(k) itself was created in 1978. If finalized, this move would unlock access to $12.5 trillion in retirement savings, potentially transforming how Americans build wealth. But this isn't just about chasing returns—it's about navigating a minefield of risks and opportunities. Let's break it down.

The Regulatory Tide Is Turning

The DOL's 2020 guidance already permitted private equity in 401(k) plans if it was part of a diversified portfolio, but uptake was sluggish due to fiduciary liability fears. Now, Trump's order aims to erase those barriers. The SEC is even mulling lifting its 15% cap on private assets in registered funds—a move that could flood the market with new vehicles for retail investors. Meanwhile, the DOL's recent rescission of its 2022 cryptocurrency guidance signals a broader shift toward “investment neutrality,” letting markets decide rather than regulators.

This isn't the first time Washington has shaken up retirement plans. In 2006, the Pension Protection Act (PPA) allowed automatic enrollment and target-date funds, which today dominate 401(k) menus. That change spurred a $5 trillion shift toward lifecycle investing. If history repeats, this new era could see trillions flowing into alternatives.

The Case for Alternatives: Higher Returns, Smoother Rides?

Proponents argue that private markets offer three key advantages over traditional stocks and bonds:

1. Higher Returns: Private equity has historically outperformed public markets. For example, Blackstone's real estate fund returned 14.6% annually over 20 years, vs. the S&P 500's ~10%. Startups, while riskier, can deliver exponential growth (think: pre-IPO stakes in companies like Uber or Airbnb).

2. Diversification: Private assets often have low correlation with public markets. In 2022, when the S&P 500 fell 19%, private equity funds fell just 5%, per Cambridge Associates.

3. Inflation Protection: Real estate and infrastructure investments often have built-in inflation hedges, like rent increases tied to CPI.

But here's the catch: liquidity. Unlike stocks, private investments can't be sold on a whim. A underscores the trade-off. For retirees needing cash, this could be catastrophic.

The Risks: Valuation Black Holes and Fee Landmines

Critics aren't wrong to worry. Three red flags stand out:

1. Valuation Opacity: Private assets aren't traded daily, so their “value” is often a guess. In 2020, WeWork's $47 billion valuation cratered to $2 billion in months—proof that even top-tier firms can fail.

2. Fee Swamps: Private funds charge 2% management fees + 20% performance fees. On a $100,000 investment, that's $2,000/year in fees alone—before returns. Compare that to a low-cost S&P 500 ETF at 0.03%.

3. Concentration Risk: A single bad bet in a private portfolio (e.g., a failed startup) can crater returns. In 2008, illiquid private equity investments forced some pension funds to sell at fire-sale prices.

How to Play This: A Pragmatic Strategy

This isn't a “buy everything private” call. Here's how to navigate:

1. Start Small: Allocate no more than 5–10% of your 401(k) to alternatives until you understand the mechanics. Think of it as a “side bet” against market volatility.

2. Demand Transparency: Look for funds with regular valuations (quarterly, not annually) and low fees. Avoid “2 and 20” structures—seek 1% and 15% instead.

3. Focus on Liquidity: Opt for funds with secondary markets or co-investment opportunities. Empower's collective investment trusts (CITs), which pool assets to ease liquidity, are a good starting point.

4. Beware of “Hot” Funds: The next WeWork is out there. Stick to established managers with long track records (e.g., Blackstone, Brookfield) and avoid funds chasing fads like crypto or meme stocks.

5. Diversify Within Alternatives: Don't put all your private eggs in one basket. Spread investments across real estate, infrastructure, venture capital, and private credit.

The Bottom Line

This executive order isn't a get-rich-quick scheme—it's a structural shift. For the average investor, the key is to treat private markets like a decades-long commitment, not a trading vehicle. If you're decades from retirement, this could be a goldmine. If you're nearing 65? Stick to cash and bonds.

The next step? Monitor when the order is signed and watch for new fund launches. Your 401(k) provider will likely add options over the next 12–18 months. When they do, remember: due diligence is non-negotiable. This is a chance to build wealth—but only if you stay vigilant.

Invest wisely—and cautiously. This is just the beginning.