In early August, you may have seen news about a Presidential Executive Order that could change the landscape of retirement investing. This has understandably raised questions for investors about their 401(k) plans and long-term strategies.
As your financial partners, our goal is to provide clarity and perspective. Here are answers to some of questions we’ve received:
1. What is this executive order and its intended goal?
The executive order directs the Department of Labor and other federal agencies to develop a framework for including “alternative assets” in defined-contribution plans, such as 401(k) plans.
The stated goal is to give more Americans access to the types of investments that have traditionally been used by large institutional investors and public pension plans. The idea is that by broadening the available options, retirement savers could potentially tap into different sources of growth and diversification beyond the traditional stock and bond markets.
However, it’s crucial to understand that this order does not create an immediate change. It’s the beginning of a regulatory process, not yet a final rule.
2. What are alternative assets and how are they different?
Alternative assets is the broad term for investments that fall outside of conventional categories like publicly traded stocks, bonds, and cash. The types mentioned in the context of this order include:
- Private Equity: Investments in companies that are not listed on a public stock exchange.
- Direct Real Estate: Ownership stakes in physical properties or projects, rather than publicly traded real estate funds.
- Digital Assets: Actively managed funds that hold cryptocurrencies or other digital tokens.
- Infrastructure Projects: Investments in large-scale projects like bridges, power grids, or transportation systems.
These assets are generally less liquid, meaning they can’t be bought or sold as quickly and easily as a stock. Their value is also determined less frequently and is not as transparent as public market pricing.
3. Are these investments well-suited for my retirement plan?
The answer is nuanced. Alternative assets carry a very different risk profile.
- Higher Potential Risk: Many of these assets, especially digital assets, have a history of high volatility.
- Illiquidity: As mentioned, you may not be able to access your money for long periods, sometimes years.
- Higher Fees: These investments typically come with steeper management fees than the mutual funds and ETFs commonly found in 401(k) plans, which can impact long-term returns.
- Complexity: They require a significant amount of due diligence to properly evaluate.
Risk is personal. It depends entirely on your individual financial situation, timeline, and tolerance for risk.
4. When could I expect to see these options in my 401(k)?
You should not expect to see these options appear in your plan anytime soon. The path to implementation is a long one with several steps:
- Rulemaking: Federal agencies must first research and propose new regulations.
- Adoption: After rules are finalized, the financial institutions that administer 401(k) plans must decide whether to build products around them.
- Plan Sponsor Approval: Finally, your employer (the plan sponsor) would have to approve and add these new, complex options to your specific plan lineup.
5. What should I do now, and how does SageSpring help?
The most important thing to do now is to continue focusing on your long-term financial plan. While the idea of new investment types can be intriguing, they also come with significant differences from traditional stocks and bonds, including higher potential risk, steeper fees, and less liquidity (meaning it can be harder to access your money). Prudent, diversified portfolios remain the foundation of sound retirement planning.
We’re here to offer guidance by:
- Monitoring the Landscape: Our team will continue to follow these regulatory developments closely.
- Vetting the Options: If and when these alternatives become available, we would apply our rigorous evaluation process to scrutinize their structure, costs, and potential role in a portfolio.
- Providing Personalized Advice: We can help you understand any new opportunity through the lens of your personal financial plan. An investment is only a fit if it aligns with your life, your goals, and your values.
While the investment landscape may evolve, our commitment to disciplined, values-driven wealth stewardship is constant. We’re here to help you make prudent, informed choices for your future.
If you have more questions about this topic or anything else related to your financial plan, please schedule a conversation with us.
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