President Donald Trump signed an Executive Order yesterday that approved alternative assets for individuals holding 401(k) retirement accounts and other defined contribution plans.
The decline of defined benefit plans by employers has led to an explosion of 401(k) plans, which are typically offered by employers but tend to provide limited choice for investors. Frequently, these plans are hobbled by outdated managers who only offer basic mutual funds and money market accounts.
By allowing the fast-growing private securities sector to be held in these accounts, investors will gain greater diversification and tap into a market that has been growing dramatically.
It should come as no surprise that digital assets are among the alternative assets that will be made available to savers.
As outlined in the EO, alternative assets are defined as:
- private market investments, including direct and indirect interests in equity, debt, or other financial instruments that are not traded on public exchanges, including those where the managers of such investments, if applicable, seek to take an active role in the management of such companies
- direct and indirect interests in real estate, including debt instruments secured by direct or indirect interests in real estate
- holdings in actively managed investment vehicles that invest in digital assets
- direct and indirect investments in commodities
- direct and indirect interests in projects financing infrastructure development
- lifetime income investment strategies, including longevity risk-sharing pools
The pending changes will benefit not only investors but also platforms already operating in these sectors, including private markets in early-stage firms and real estate investment platforms.
For firms operating in the online capital formation business, private securities issued under Reg D, Reg A, and Reg CF may be held within these plans.
Platforms offering secondaries in private securities should also anticipate the opportunity to create a new channel for customers.
As digital assets are part of the EO, crypto exchanges and hybrid everything platforms may soon be able to pitch their services to 401(k) operators.
The EO requires the Secretary of the Department of Labor to provide guidance regarding fiduciary responsibilities. The guidance will be pursued in concert with the SEC and the Secretary of the Treasury. In six months, we should learn more.
It is important to note the EO addresses the definition of an Accredited Investor, a rule that currently discriminates against the majority of the population. There is pending legislation to address this flawed rule but their may be some room for rulemaking to accomplish this task.
