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Trump's pension reform policy has sparked controversy: democratized investment or systemic risk?
Authors: Antoine Gara, Jamie John, Eric Platt
Compiled by: Block unicorn
Recently, Donald Trump opened the door for trillions of dollars in new investments from American retirement savers into the private equity and cryptocurrency industries, which could reshape the financial future of 90 million Americans and accelerate the growth of asset management firms and digital currency groups.
However, the order allowing 401k savings plans to invest in a range of alternative assets also exposes American retirees to new risks.
This measure was introduced after strong lobbying by private capital groups such as Apollo Global Management and BlackRock, which believe that joining these retirement plans is a way to attract hundreds of billions of dollars in lucrative assets.
It is expected that this measure will allow retirement funds to invest in a range of unlisted investments, from corporate acquisitions and private loans to infrastructure deals. This could expose them to higher fees and lower transparency. Of the $9 trillion in assets held in these 401k plans, some may be directed toward assets that are difficult to value and sell, which differ from the traditional stocks and bonds that currently make up the majority of retirement plans.
Sean Mackey, global head of asset management at KPMG's audit department, stated: "The door to alternative investments is wider open than ever before." He added, "Many leaders will see this as an opportunity for a business model."
Benjamin Shafrin, the securities policy director of Better Markets, warned that this move is "bad news" for 401k plan holders. He stated, "Retail investors will be facing a completely different type of asset, and they may not be aware of it."
The acquisition group has been working hard to sell trillions of dollars in investments and bring returns to investors. This has prompted pension funds and foundations to withdraw from the industry, cutting off a significant source of cash. Large private equity groups like BlackRock have turned to rely on managing the savings of retirees and wealthy individuals for their future growth.
Wall Street successfully persuaded Trump to sign this order, which will provide important political and legal protection for the industry as they seek to convince 401k plan managers to include their funds in investment plans. According to their financial disclosures, Apollo, Carlyle, and BlackRock engaged in strong lobbying efforts.
Other groups, such as BlackRock, are working through industry associations.
Some of the most influential leaders in the industry — including Apollo chief Mark Rowen — have publicly supported this effort.
Luo Wen and his colleagues publicly stated that 401k savers who do not enter the private placement market will miss out on diversification and high return potential.
Rohwen stated in February: "We are essentially betting the country's retirement system on Nvidia," referring to the fact that 401k savings are highly concentrated in a few technology-dominated index funds. This week, he reiterated his call to open the 401k market to private investment, calling it "common sense."
According to insiders, the influential lobbying group favored by many large private equity firms, the (Defined Contribution Alternatives Association), even claimed in Washington that 401k plans could be sued for not providing higher returns from private equity transactions.
The CEO of Carlyle, Harvey Schwartz, stated that this order "should have been issued long ago" because "wealthy clients have already been able to access this field."
BlackRock stated that adding private investments to retirement plans will "ensure that millions of Americans build stronger and more diversified portfolios."
According to an official, in the White House, Trump's National Economic Council and Council of Economic Advisers acted as liaisons between the private capital industry and the president. The office of Deputy Chief of Staff Stephen Miller assisted in drafting this order.
A senior advisor stated that the government's interest in cryptocurrency played a role in bringing this order to the president's desk, noting its popularity in the White House.
Trump has made the deregulation of digital assets a central issue of his administration, believing that the industry helped him win the 2024 presidential election. Entities controlled by the Trump family have also recently invested billions of dollars in cryptocurrency.
Some people in the private equity industry are concerned that this order will link their funds to newer, more speculative cryptocurrencies, especially in light of the painful losses suffered by 401k plans due to investments in digital assets. However, sources say they view this as an acceptable trade-off.
Although there is no explicit prohibition against investing in alternative assets, 401k plan managers have been cautious about investing in these assets. Most managers are concerned about facing lawsuits from employees due to investing in these funds, both because of the high fees associated with these funds and the higher leverage used by many strategies.
Rajiv Chandrasekaran, a partner at Simpson Thacher & Bartlett, stated: "The costs of these lawsuits are high, and there are many settlement cases, but the instances of plaintiffs winning in court are very few." He added that this concern has created a significant chilling effect "regardless of the basis of the lawsuit."
Trump instructed government agencies to facilitate 401k plan managers, making it easier for them to offer private investments, with some measures including provisions aimed at curbing lawsuits against private investment strategies.
White House Deputy Press Secretary Kush Dorsey stated, "The only special interest guiding President Trump's decisions is the best interest of the American people."
"The president's historic executive order fulfills his promise to democratize, modernize, and expand retirement investment options for ordinary Americans, thereby making America prosperous again."
The focus now shifts to the Department of Labor, which is responsible for overseeing and enforcing the 1974 law that set standards for companies providing 401k benefits.
Asset management companies are competing to prepare 401k products in anticipation of the Department of Labor's guidance expected to be released in the next six months. Many companies have announced partnerships to offer private investments in target date funds, with professionals selecting assets for decades-long retirement plans. These funds will mix investments in publicly traded stocks and bonds as well as more opaque private assets.
Other companies provide private investment channels more directly, but require the company to offer advisory services for 401k participants looking to invest.
Empower, the second largest retirement plan provider in the United States, announced in May that it will collaborate with Apollo, Goldman Sachs Asset Management, and Partners Group to provide private asset investment channels for retirement plans.
A month later, BlackRock announced that it would provide a target date fund that combines public and private investments for 401k provider Great Gray Trust. Additionally, BlackRock is developing its own target date fund that includes private assets.
Other partnerships have also emerged. BlackRock has established a "strategic alliance" with Vanguard and Wellington Management to create public-private hybrid funds for retirees, while KKR and Capital Group are exploring the creation of model portfolios and target date funds that span both public and private sectors.
Michael Pedroni, a former Treasury official and current managing policy consultant at Highland Global, stated that the "big question" regarding how much extra American families are willing to pay to acquire private assets remains unresolved, as the identification and management costs of these assets are higher, thus the fees are also higher.
"Currently, Americans are accustomed to paying fees of 30 to 50 basis points for their 401k. If the fees rise to 80 basis points, would they be willing to pay?"