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Wall Street Wants Your 401(k) to Change. Should You?

Source: Bloomberg Business

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Big changes could be coming for your 401(k).

For years, Wall Street firms have been pushing for greater inclusion of "alternative assets" in workplace retirement accounts. This includes cryptocurrency as well as stakes in private companies that don't trade on public stock markets and exposure to private credit, which is essentially a shadow lending market.

Proponents got a big win this week. A new Trump administration proposal from the Labor Department aims to give companies offering alternative assets in retirement savings plans more legal protection, a change asset managers have sought for years. They argue more exposure to such investments could give retirement savers better risk-adjusted returns in their portfolios. But it comes at a time when many alternative assets have been struggling, and consumer advocates are warning about the opacity and illiquidity of such investments.

To unpack all these developments, I called on my colleague Suzanne Woolley, who covers retirement savings and plans. Here is what she told me:

Charlie Wells: First things first, Suzanne, what are alternative assets?

Suzanne Woolley: The term covers a very wide array of non-traditional assets, including private equity, private credit, hedge funds, real estate, infrastructure investments and cryptocurrency. You can stretch it further to include things like timber, commodities and even things like art or wine or sports teams. For the purposes of what we're talking about today, it's basically private equity, private credit, real estate and crypto.

CW: How and why are advocates pitching for the inclusion of these assets in retirement plans?

SW: Alternative asset managers really want to get a firm foothold in the more than $14 trillion in assets that sit in workplace retirement savings plans like 401(k)s and 403(b)s. Asset managers love plans like these because money from them comes in very steadily, for one thing. Also, some of the usual buyers for much of what alternative asset managers are selling have pulled back from the assets in recent years, and managers need to tap a new pool of money. The companies pitch it as a sort of "democratization" of these assets so that the little guy can get the same access as institutions and high net-worth investors to what can be higher-return assets.

CW: What are the risks?

SW: Look at what's going on in the private credit market, with some big bankruptcies causing real problems. At the same time, many investors in private credit funds have indicated they want out, but illiquidity is part of these investments -- there is an "illiquidity premium" for agreeing, largely, to lock up their money for years. More retail investors got into these funds and now can't get all of their money out when they want to. Other risks include higher fees, which eat away at a portfolio over time, and the fact that the valuation of these assets are often calculated by the company and done quarterly. The funds are kind of black boxes.

CW: One of the real concerns some make is that retirees are living longer, and do need to take on more risk in their portfolios. Are alternatives a part of that, or is there a more conventional solution?

SW: It's true that the universe of private market companies has been growing while the world of publicly traded companies is shrinking. So if you only stick with publicly traded securities, you're not exposed to the whole economic picture. And there's data showing that these funds can add value to a portfolio, in risk-adjusted returns -- although higher fees eat into that. You just need to know what you’re getting into. Meanwhile, the disclosures and transparency just aren't close to what's there in public markets. So alternative assets could be part of the answer, as could keeping a higher percentage in public equities as you get older, if your finances can handle that risk.

CW: Why is this guidance on alternative assets garnering so much attention? From the outside, it feels like a lot of focus on a rule change, a government department, and many hypotheticals.

SW: The world of workplace retirement savings is a pretty conservative place, for good reason. Under a federal law called ERISA, plan sponsors, who are fiduciaries, must be "prudent" in choosing investments and curate a menu of funds in the best interests of plan participants. There has been a huge wave of lawsuits in recent years against plan sponsors alleging that fees were too high or funds were poor choices. The Department of Labor says that has stifled innovation in 401(k) plans to the detriment of retirement savers. So the DOL, at the behest of President Donald Trump, is working to lessen fiduciary risk for plan sponsors, and not everyone thinks the changes are for the better of people in plans. Until now, investments in 401(k)s have been pretty dull -- lots of index funds. These new categories are high-fee and complex. Consumer advocates worry that alternative assets won't improve risk-adjusted returns after fees, and that they could actually hurt financial security.

CW: Let's say these hypotheticals turn into reality and alternative assets start showing up more on the menu for employees' 401(k) plans. What would that look like?

SW: For all the Sturm und Drang it may not be that dramatic or even obvious when alternatives become more common in plans. They'll likely show up as a modest allocation among all the other categories of assets that are bundled and packaged into diversified target-date funds (TDFs). Some TDFs already have these assets in them, to a degree. Alts have been allowed in plans, but the litigation risk may have stopped plan sponsors from really considering them. Plan sponsors haven't been clamoring to add these assets, and odds are that it will take a good amount of time before alternatives are common in plans.

CW: What's next in this saga?

SW: There's a 60-day public comment period and I am looking forward, nerd that I am, to reading those comments. After that, a DOL official has said they aim to have the proposed rules finalized by the end of the year. But what's really next are all the products in the works that asset managers will roll out in coming years for the 401(k) market. It will be a lot.

P.S. Send questions about your own financial dilemmas to bbgwealth@bloomberg.net. We may get expert answers for you and feature your question and the answer in an upcoming newsletter.

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The biggest gainers and losers on the Bloomberg Billionaires Index over the past week through close of trading Wednesday:

Yat-Gai Au gained the most in percentage terms. The founder and chief executive of Regencell, a developer of traditional Chinese medicine, clocked a 40% gain, bringing his current worth to $14.8 billion. Au's fortune is derived from his stake in Regencell, shares of which were up some 40% on the week.

Changpeng Zhao lost the most in percentage terms. Zhao is the founder of Binance, the world's largest cryptocurrency-exchange by volume. He lost some 23%, bringing his current worth to $30.6 billion. Zhao's fortune is derived from his controlling stake in Binance, which is down roughly 23% this week.

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A limited-liability company linked to Jurvetson bought the lakefront estate -- and its adjoining $7 million parcel -- in a off-market deal that closed earlier this week, from a company with ties to investor Gene Pretti, property records and LLC filings show.

UAE Developers Rush to Reassure Investors Wary of War Risk
A number of developers in the United Arab Emirates have held calls with investors to allay concerns over a potential liquidity crunch, a stark reversal of fortunes as the Iran war approaches the one-month mark.

Developers including Binghatti Holding Ltd. and Omniyat Holdings Ltd. spoke with investors on Wednesday as their bonds slipped into distressed territory following the conflict, according to people familiar with the matter who asked not to be identified discussing confidential information.

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Wall Street Wants Your 401(k) to Change. Should You?

Wealth Gains

Real Estate Watch

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