The debate about whether Americans should be allowed to hold private-market assets in their retirement accounts has, once again, produced more heat than light.
Critics of recent proposals to open 401(k)s to alternatives such as private equity, private credit and real estate warn of systemic risk and suggest that ordinary savers can’t be trusted with anything more complex than an index fund. They’re solving the wrong problem.
The question has never been whether Americans should have access to alternatives in their retirement accounts. Under existing tax law, they already can. Self-directed IRAs and Solo 401(k)s have permitted investments in real estate, private equity, private credit, precious metals and digital assets for decades. The infrastructure exists.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
What Congress has done
The legal framework was settled in 1974. When Congress created IRAs and 401(k) plans under ERISA, it deliberately chose to allow retirement accounts to be invested in both traditional and alternative assets.
That was not an oversight. Congress could have easily restricted retirement vehicles to conventional holdings, as it later did with 529 education savings plans. It chose not to.
Pension plans, endowments and individual retirement investors were meant to have the ability to diversify across asset classes. That original intent has never changed.
The real question is whether we extend that access responsibly to everyone or continue reserving it for those wealthy enough to know it exists.
That’s the two-tiered system critics should be concerned about. Today, institutions and high-net-worth investors allocate heavily to private markets, capturing illiquidity premiums, diversification and long-term return profiles that public markets increasingly can’t offer.
Who gets to access what
Meanwhile, ordinary retirement savers get a menu of mutual funds and target-date vehicles, most anchored to the same handful of large-cap tech stocks. The diversified portfolio is already available. The question is who gets to access it.
This concentration risk is not theoretical. American retirement investors exclusively in traditional assets are, in practice, not well diversified. Their life savings are heavily exposed to a narrow set of equities, and that concentration is far riskier than a portfolio that includes a measured allocation to alternatives.
The argument that alternatives introduce undue risk ignores the risk already embedded in a retirement account that rises and falls with a handful of stocks.
In 2022, the market made this imbalance impossible to ignore. Stocks and bonds declined simultaneously, exposing the structural vulnerability at the heart of the traditional 60/40 portfolio.
In a high-inflation, rising-rate environment, fixed income lost its cushion precisely when investors needed it most. Alternatives, real estate, private credit and hard assets held value. The investors who owned them were protected. Everyone else absorbed the full impact.
This doesn’t imply that a free-for-all is the way. Structured access allows us all the best path forward.
Access with guardrails
Everyday retirement savers should have access to professionally managed, fiduciary-governed exposure to private markets, with clear guardrails around fees, liquidity, custody, investor education and suitability.
The concern that unsophisticated investors will be handed illiquid, higher-fee private equity funds with no understanding of what they own is legitimate. The answer to that concern is smarter regulatory frameworks, not a blanket prohibition.
It’s also worth noting that retirement accounts might be among the most appropriate vehicles for alternative investments. Retirement funds and 401(k) plans are generally locked up for years or decades. That illiquidity is a feature, not a flaw.
Many alternative assets — private equity, real estate, hedge funds — share that same long time horizon.
Investors who hold illiquid alternatives in retirement accounts are positioned to capture the illiquidity premium and patience premium these assets typically generate, the higher returns that compensate long-term holders for forgoing liquidity.
A natural alignment
The structure of a retirement account and the structure of a private market investment are, in many respects, naturally aligned.
The accredited investor rules that already exist provide meaningful guardrails for investors seeking exposure to alternatives outside retirement accounts. Those rules serve an important function, and there is a strong case for the SEC to expand the definition of accredited investor to allow more Americans access to private markets and better diversification.
But those guardrails aren’t an argument for keeping alternatives out of retirement accounts entirely. They’re evidence that thoughtful, structured access is achievable. That same spirit of structured access can and should extend to the broader retirement market.
Complex rules with thoughtful integration
Building successful self-directed platforms requires thoughtfully integrating complex tax and ERISA rules into systems and processes that investors, advisers and planners can use confidently and effectively in the long term.
Compliance isn’t an obstacle to access. It’s what makes access durable. Prohibited transaction rules, disqualified person restrictions, custody requirements, reporting obligations — these aren’t bureaucratic annoyances.
They’re the guardrails that keep the system honest. The right policy goal is to extend those guardrails to the broader 401(k) market, not to wall off private markets entirely and call it protection.
The Department of Labor’s recent proposal to provide plan fiduciaries a clearer safe harbor for adding certain alternative assets to 401(k) lineups is a meaningful step in this direction.
Plan sponsors have long avoided alternatives not because they’re inherently inappropriate but because the legal exposure of offering them was unclear
A safe harbor built around diversification, fee transparency and liquidity requirements doesn’t invite abuse. It eliminates ambiguity and legal uncertainty. That’s how you expand access without abandoning responsibility.
Protection vs preservation
Critics who argue alternatives don’t belong in retirement accounts are, in practice, arguing they should remain exclusive to those wealthy enough to access them elsewhere.
That’s not a protection argument. It’s a preservation argument, preserving a system in which the sophisticated investor has options, and the ordinary saver does not.
Americans deserve a retirement system built for the economy they actually live in, not the one that financial institutions find easiest to administer.
That means access to a broader opportunity set, delivered through structures that protect investors rather than simply exclude them. It means fiduciary oversight without fiduciary paralysis, and better rails rather than narrower choices.
The debate is not about whether to protect retirement savers. Everyone agrees they should be protected.
The debate is about whether protection requires keeping them permanently locked out of the same assets that have built generational wealth for institutions and individuals who already have enough. It does not.
The work is building the infrastructure that makes broader access safe. With that work well underway, it’s time that policy catches up.
