DC Plans and Alternative Investments: Policy Progress, But Practical Constraints Remain
On August 7, 2025, President Trump signed an Executive Order titled “Democratizing Access to Alternative Assets for 401(k) Investors,” opening the door for access to alternative investments within $13 trillion defined contribution plan market. The executive order directs federal agencies to review and revise guidance and regulations to permit alternative investments within participant-directed defined-contribution plans such as 401(k) plans.
Following the Executive Order, the Department of Labor (DOL) subsequently rescinded a 2021 statement that had cautioned plan sponsors against including private equity in defined-contribution plans, signaling a clear shift in regulatory posture from a more cautious stance to a more open/neutral attitude towards alternative assets in DC plans.
What Are “Alternative Investments”?
Alternative investments refer to options outside the typical mutual funds and collective investment trusts (CITs) that hold public stocks and bonds commonly found in retirement plan line-ups. Per the executive order, “alternative assets” include private market investments, private real estate, commodities, digital assets, and infrastructure. These strategies, already commonplace in defined-benefit plan portfolios, are now being considered for the DC market.
Opportunities and Challenges
The potential benefits of including alternative investments in DC plans include greater diversification and the potential for enhanced long-term risk-adjusted returns. However, incorporating alternative investments in DC plans raises complex considerations for plan sponsors, fiduciaries and investors:
Liquidity mismatch: DC plan assets must be liquid on a daily basis for trading, withdrawals, and rollovers, while private market investments are typically illiquid and may have long lock- ups.
Valuation and transparency: Unlike publicly traded securities, many alternative investments lack daily pricing and standardized reporting.
Higher fees: Many alternative funds have layers of management and performance fees, which can significantly impact net of fee returns.
Fiduciary risk: Plan sponsors (employers) must ensure investments are prudent under ERISA. If an alternative fund underperforms or is deemed too risky, sponsors could face legal exposure.
Participant complexity: Many 401(k) participants are not equipped to evaluate or understand alternative investment strategies.
Potential Implementation
The push to broaden participant access could eventually lead to alternative investment integration in a diversified fund portfolio, with the leading avenue likely a Target Date Fund vehicle. The potential also exists for inclusion in an advice program where participants use a managed account service to receive exposure to alternative investments as part of their individually tailored custom portfolio. However, additional regulatory action by the Department of Labor is necessary to implement the President’s directive.
Practical Takeaway
While the recent executive order and DOL action mark an important policy shift toward expanding investment choice, the practical inclusion of alternative assets in 401(k) plans will depend on further regulatory clarity, product development and operational readiness. For now, plan sponsors should view this as a developing opportunity that warrants careful monitoring, but not yet broad implementation.
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