Trump's 401(k) Executive Order: Weighing the Risks of Crypto and Private Equity Exposure in Retirement Accounts

The U.S. Department of Labor's recent rescission of restrictions on cryptocurrency and private equity in retirement accounts has reignited a debate about the wisdom of exposing ordinary savers to high-risk, illiquid assets. President Trump's 2025 executive order, which mandates a reevaluation of ERISA guidelines to allow 401(k) plans to include these alternatives, is framed as a democratization of investment opportunities. Yet, for millions of Americans nearing retirement, the move raises urgent questions: Do these assets truly enhance portfolio resilience, or do they introduce risks that could erode decades of savings?

The Allure and the Hazards of Alternative Assets

Private equity and cryptocurrency have long been touted as tools for diversification and long-term growth. Proponents argue that their low correlation to traditional assets can smooth out portfolio volatility. For instance, a 5% allocation to Bitcoin in a 60/40 stock-bond portfolio could theoretically boost risk-adjusted returns, according to Grayscale simulations. However, the data tells a more nuanced story.

Over the past five years, private equity has underperformed the S&P 500 across nearly every time horizon. Deal activity in private equity collapsed by 60% between 2022 and 2023, while exit values dropped 66%. Institutional investors, including New York City's pension system and Harvard's endowment, have begun divesting from underperforming private equity stakes at discounts, signaling a liquidity crisis. Meanwhile, crypto's volatility—Bitcoin's annualized volatility of 83% over the past decade—far exceeds that of the S&P 500 (16%), making it a double-edged sword for risk-averse retirees.

Illiquidity and Complexity: The Hidden Costs

The executive order's emphasis on “democratizing access” overlooks a critical flaw: the inherent illiquidity of these assets. Private equity funds typically lock up capital for a decade or more, while crypto, though more liquid, remains subject to sudden crashes. For retirees who may need to access funds during market downturns, this lack of flexibility could prove catastrophic.

Consider the case of PE-backed firms: 70% of large U.S. bankruptcies in 2024–2025 involved companies funded by private equity. These firms often carry heavy debt loads, making them vulnerable to rising interest rates. Similarly, crypto's recent history—marked by the collapse of FTX and a 77% average drawdown in Bitcoin's four major crashes—highlights its systemic risks.

Moreover, the complexity of managing these assets adds layers of cost. Private equity typically charges 2% annual management fees and 20% performance fees, eroding net returns. Crypto custodial services, regulatory compliance, and valuation challenges further complicate retirement plan administration. For fiduciaries, the burden of due diligence is immense: a “facts and circumstances” approach, as mandated by the 2025 DOL guidance, requires expertise many plan sponsors lack.

Diversification or Distraction?

The executive order's proponents argue that crypto and private equity offer diversification benefits. Yet, historical data suggests these assets may not behave as expected during crises. During the 2022–2023 market turmoil, crypto's correlation with equities spiked, negating its supposed diversification value. Similarly, private equity's long lock-up periods mean it cannot be quickly reallocated during downturns.

For near retirees, the risks are amplified. A 65-year-old with a 10-year time horizon cannot afford to tie up capital in illiquid assets that may lose value during a market correction. The average retiree's portfolio, already vulnerable to sequence-of-returns risk, could face further erosion if exposed to volatile alternatives.

A Pragmatic Path Forward

While the executive order opens the door to alternative investments, prudence is essential. For retirees and those approaching retirement, a conservative approach is warranted:
1. Limit Exposure: If including crypto or private equity, cap allocations at 5% of the portfolio to mitigate downside risk.
2. Prioritize Liquidity: Focus on traditional assets like stocks, bonds, and real estate REITs, which offer more predictable cash flows.
3. Demand Transparency: Fiduciaries must ensure that alternative investments are professionally managed and regularly evaluated for performance and risk.

For younger investors with longer time horizons, a small allocation to alternatives could enhance diversification, but only after rigorous due diligence. The key is to balance innovation with caution—a lesson the 2025 executive order seems to overlook.

Conclusion

The Trump administration's push to expand 401(k) options reflects a broader ideological shift toward deregulation. Yet, for most Americans, the inclusion of crypto and private equity in retirement accounts is a gamble with uncertain rewards. While these assets may offer diversification in theory, their volatility, illiquidity, and complexity pose real threats to long-term portfolio resilience. As the Department of Labor finalizes its guidance, investors must ask: Are we modernizing retirement savings—or exposing them to unnecessary peril? The answer may determine the financial security of millions in the years to come.