Alternative Assets in a 401(k)? What Financial Advisors Really Think

President Donald Trump’s executive order cleared a path to invest alternative assets in 401(k)s and other retirement accounts—and sparked a lot of debate about the idea. 

Most U.S. retirement accounts hold basic, publicly traded stocks and bonds. The executive order said alternative investments, such as private equity, real estate, or cryptocurrencies, should also be options for workers to include in their defined-contribution retirement plans.

The order signed on Aug. 7 directs the Department of Labor to reevaluate the fiduciary duty rules that deter defined-contribution retirement plans from offering alternative investments. It also instructs the Securities and Exchange Commission and the Treasury to revise regulations to facilitate the investment of retirement funds in alternative assets.

The ability to invest these kinds of assets in retirement plans isn’t new. However, the order will make it easier for 401(k)s and other employer-sponsored retirement plans to offer these options. 

What’s Changing

It’s up to employers to decide which funds are available as investments in company-sponsored retirement plans. But the order pushes for these options to be made more widely available to retirement savers.

The executive order certainly has investors and advisors rethinking the boundaries of retirement investing, said certified financial planner Patrick Huey.

“While the promise of broader access to alternative assets is front-and-center, the practical reality—and the prudent path—remains far more nuanced,” Huey said.

As a result, many plan participants are left wondering about the benefits or drawbacks of this type of investing, whether it’s right for them, and what these changes could mean for their money.

Investopedia asked a range of financial advisors their thoughts on the executive order and the future of retirement saving. Here’s what they said. 

Why It Might Be For You…

While alternative assets have been available in retirement plans before, many financial advisors strongly urge their clients to consider all their options before jumping in.

That’s because alternative investments typically require longer time horizons and often have big performance swings that can fuel financial anxiety for those who aren’t prepared. Plus, they are less transparent and less liquid, which makes them harder to access in the event of a hardship.

“For most, the emotional and logistical burden of understanding and servicing illiquid or complex alternatives is more than the potential benefit, especially inside a retirement vehicle where liquidity and transparency are paramount,” Huey said.

If you have the ability to access other capital more easily, though, as well as the stomach and patience for it, certified financial planner Luke Harder said he is open to exploring alternatives with his clients as long as their balance sheet and risk tolerance align.

“But I would never recommend these assets to someone whose retirement plan would be derailed if things didn’t go as hoped,” Harder said.

If given the time, these investments can be quite lucrative. Research from alternative asset managers Apollo and BlackRock shows that private assets can add significant upside potential to retirement accounts. Fidelity research also showed that private equity outperformed all other traditional and alternative asset categories over a particular period.

“Even then, it should be a small sleeve on top of a low-cost public equity core,” said certified financial planner Jared Gagne.

For Most, The Basics Will Do

The general consensus from financial advisors is that the majority of retirement savers should stick to traditional investments, like stocks and bonds. 

Certified financial planner Michael Espinosa said the majority of his roughly 70 individual retirement plan clients have chosen to stick with traditional asset classes versus the risky and complex alternatives. Retirement planning is already stressful enough, he said. 

“Interest at the plan sponsor level remains low, and we will not be recommending these types of asset classes in retirement plans anytime soon,” Espinosa said.

Huey said that, in his experience, most clients haven’t considered alternative investments, not because of regulations but because of personal fit.

“Alternatives can add value, but rarely as a first step. Sometimes, the most democratic outcome is steady access to time-tested basics,” Huey said. “The basics still move the needle, not bells and whistles.”

Leave It To The Pros

For investors who want to try alternative investments in their retirement plans, financial experts strongly urge them not to go it alone.

“Alternative investments are best accessed when embedded within professionally managed vehicles rather than as direct investments by individual retirement savers,” said Kourtney Gibson, CEO of retirement solutions at TIAA.

Seeking professional help with more complex investments like private equity can help investors get a feel for their risk tolerance.

“It’s still something of a luxury to explore these options, and doing so requires navigating with extreme caution, and prioritizing managers with a strong track record and high transparency,” Harder said. 

Many financial advisors said they expect interest in these alternative investments to grow as more people become aware of them and they become more accessible. However, Gibson said she doesn’t expect to see changes quickly.

“While the Executive Order signals an important federal regulatory shift toward expanding investment options in retirement accounts, investors shouldn’t expect immediate change,” Gibson said. “The regulatory rewrites could take months or longer to implement, giving plan sponsors and administrators time to prepare for this new landscape,”