Will the trillion-dollar U.S. pension funds flood into Crypto Assets? What are the risks of this gamble?

Author: FinTax Owen

On August 7, Eastern Time, U.S. President Trump signed an executive order Democratizing Access to Alternative Assets for 401(k) Investors at the White House, requiring the Department of the Treasury, the Department of Labor, and the Securities and Exchange Commission (SEC) to initiate rule amendments to include cryptocurrencies, real estate, private equity, and other "Alternative Assets" within the investment scope of 401(k) pension plans. This news was like a thunderclap, quickly shaking the global financial markets — it not only has the potential to unlock up to $8.7 trillion in pension funds but is also seen as a key step for crypto assets moving from the fringe experiment to the mainstream financial system.

Despite the White House claiming that this move aims to "expand ordinary investors' access to diversified assets," a core issue has surfaced: has this opened a new chapter for the retirement future of Americans to increase wealth, or is it a reckless nationwide gamble?

1. 401(k) Plan: The Cornerstone of the American Pension System

To understand the importance of this move, one must first clarify the significance of 401(k) in the U.S. retirement security system. The U.S. pension system is composed of three main pillars: the first pillar is the government-operated mandatory Social Security, which pays basic pensions to retirees monthly; the second pillar is the employer-sponsored retirement savings plan, among which the 401(k) is the most common, accumulating funds through employee pre-tax contributions and employer matching contributions, with limited investment options provided by the employer; the third pillar is the Individual Retirement Account (IRA), voluntarily opened by individuals, with a broader range of investment options, some types of which have long allowed investments in cryptocurrencies.

In the second pillar, 401(k) is the most representative employer retirement plan, with most employers supporting employee participation and accumulating funds through payroll deductions and matching contributions to achieve compound growth. In addition to 401(k), there are also 403(b) plans for employees of public education institutions and certain non-profit organizations. As of the first quarter of 2025, the market size of the U.S. 401(k) has exceeded $8.7 trillion, serving as a core guarantee for the retirement life of tens of millions of American families.

Compared to mandatory government social security, the biggest difference between IRA and 401(k) as voluntary savings plans lies in investment autonomy: both types of accounts enjoy tax-deferred or tax-exempt treatment on investment income, but IRA has a broader range of investment options, allowing direct holdings of various assets (including allocations in cryptocurrencies in certain types); the investment scope of 401(k) is long-term restricted, with most funds directed towards low-risk products packaged by employer-selected asset management firms (such as mutual funds, bonds, etc.), rather than directly holding spot assets. Trump's reform this time is aimed at loosening the investment restrictions of 401(k), creating institutional conditions for high-volatility assets like cryptocurrencies to enter mainstream retirement investment portfolios.

2. From Strict Prohibition to Release: A Shift in Regulatory Concepts and Market Realities

For a long time, the U.S. 401(k) plan has strictly excluded high-risk assets such as cryptocurrencies, primarily to protect the safety and stability of retirement savings. The high volatility is inherently contrary to the goal of steady growth in pensions, and regulators are concerned about the lack of risk tolerance and professional judgment among ordinary investors. Once the market experiences severe fluctuations, it will directly impact their retirement security. At the same time, financial institutions face additional costs and risks in custody, valuation, and compliance, which also encourages policies to remain tight in the long term.

The recent executive order signed by the Trump administration to relax restrictions is not a whimsical policy decision, but rather the result of multiple overlapping factors: on one hand, it responds to the public's demand for high-yield channels in an environment of low interest rates and high inflation, fulfilling the campaign promise of "de-regulation"; on the other hand, it is a realization of political capital — the cryptocurrency industry supported the Trump campaign, and his family has investments in the crypto space; a deeper context is that the crypto market is no longer a marginal experiment, but is gradually being viewed as a mainstream asset driven by institutional investment, ETF approvals, and accelerated global compliance processes.

It is worth noting that this policy is not only aimed at cryptocurrencies but rather at a broader category of "Alternative Assets," which is officially defined to include private equity, real estate, commodities, and digital currencies. This means that the original intention of the policy is to comprehensively relax investment restrictions to expand the options available to individual investors, catering to society's enthusiasm for pursuing high-yield assets.

It can be said that this shift from "prohibition" to "release" not only reflects the loosening of regulatory concepts in the United States but also mirrors the changes in the capital market structure and the reshaping of the political ecology.

3. Far-reaching impact: A gamble may begin here

Incorporating cryptocurrencies and other Alternative Assets into the 401(k) investment scope means that the U.S. government is launching an unprecedented high-risk experiment in the retirement system. Once pension funds enter the crypto market on a large scale, it will not only significantly enhance market liquidity and price stability but also create a binding of interests between the government and the crypto market: when the retirement savings of millions of Americans are linked to crypto assets, the government will have to consider how to maintain market stability in policy making. This deep binding could greatly accelerate the compliance process of cryptocurrencies, forcing regulatory agencies to introduce clearer and more comprehensive regulations, thereby improving the overall market's maturity, transparency, and credibility, and attracting more mainstream institutions and individual investors to participate.

At the same time, deeper political considerations include the fact that vested interests may even grant pro-crypto policies continuity across party transitions. It elevates the protection of cryptocurrencies from Trump's personal or party actions to a "forced choice" of the government to protect national assets — any measures that undermine the crypto market may be viewed by voters as "tampering with their retirement cheese," potentially triggering a political backlash.

(When your pension is on the chain, will they still dare to say "no"? Image source: created by the author)

However, this gamble is fraught with concerns. The crypto market is known for its volatile price fluctuations, and the cyclical transitions between bull and bear markets are often accompanied by significant asset shrinkage. More critically, structural issues such as fraud, money laundering, and illegal financing still lurk within the market, with some assets lacking transparency and security incidents occurring frequently on trading platforms. If pension funds suffer a severe blow in this environment, the losses will not only be reflected on paper but will also trigger a crisis of trust at the societal level — the future security of millions of American families will be directly shaken, and political pressure will quickly transmit to the White House and Congress. At that time, the government may be forced to intervene financially to stabilize the market, resulting in a dual hijacking of policy and market.

In other words, this move could either push cryptocurrencies into an era of institutionalization and comprehensive regulation, or it could backfire on policymakers when risks spiral out of control, turning this "bold attempt" into a period of reflection or even criticism.

4. Another Perspective: The Fiscal Game Behind Tax Deferral

For a long time, there have been two models for the U.S. 401(k) plan regarding tax arrangements: the traditional model takes "pre-tax contributions, taxed as ordinary income upon withdrawal," while the Roth model is "post-tax contributions, tax-free withdrawals when qualified"—regardless of which model, both have the effect of delaying taxes on investment gains, which is also their long-term appeal. Therefore, including crypto assets in the 401(k) investment scope will not change these basic tax law rules, but it means that this highly volatile asset has entered a compliant "shell" for the first time, allowing investors to enjoy tax advantages of the accounts while betting on the long-term growth of the crypto market.

In this framework, the fiscal impact resembles a temporal tax game. For investors choosing the "traditional account," current taxable income decreases, leading to a short-term reduction in government tax revenue, but in the future, during the withdrawal phase, it will be counted as taxable income all at once. This is a typical "catch and release" strategy—exchanging today’s gains for a larger tax base decades later. If crypto assets succeed in the long term, the returns realized at retirement may far exceed the current ones, thereby bringing higher tax revenue to the government; conversely, if the market is sluggish or the policy environment shifts, the short-term sacrifice in taxes may lead to long-term fiscal shortcomings. This is also where the greatest risks and uncertainties of this move lie in terms of fiscal and tax implications.

Source: Wu Says Blockchain