Participants in defined contribution (DC) plans may have more access to several types of alternative investments under an executive order issued by President Donald Trump in August.

The order, “Democratizing Access to Alternative Assets for 401(k) Investors,” directs the Secretary of Labor to reexamine the Department of Labor’s (DOL’s) past and present guidance under the Employee Retirement Income Security Act (ERISA) on the matter of “making available to participants an asset allocation fund that includes investments in alternative assets.”

The order also directs the Secretary of Labor to clarify the DOL’s position on alternative assets and propose rules, regulations or guidance to clarify the duties that a fiduciary owes to plan participants under ERISA when deciding whether to make these funds available to plan participants.

According to the executive order, the term alternative assets means:

• 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 are investing 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.

A recent article from Plan Sponsor reported that 3.9% of DC plans included alternative investments such as private equity in 2024.

A survey by BlackRock that was conducted prior to the executive order showed that 24% of retirement plan sponsors said they were considering adding alternative assets to their plan. Among those respondents, 39% stated that they would most likely use a target-date fund (TDF) as the vehicle to offer alternative assets. TDFs are funds of funds that invest in a mix of assets that is automatically reset at specific times as the target date approaches.

The following provides some basic information about each type of alternative investment identified in the executive order.

Private Market Investments

Private market investments are an alternative investment class that consists of debt and equity investments in privately held companies and assets that are not listed on a public exchange, such as the New York Stock Exchange. That means investors don’t have access to daily stock price information on those companies as they would with a publicly traded firm.

At the end of 2023, there were about 78,000 companies in the United States that had more than $10 million in revenue, and only about 4,500 were public companies. About 97% are privately held, and about 11,500 of these companies are owned by private equity firms.

Companies are closely held and controlled and often are family businesses. Investors might make a direct investment or coinvestment in the fund. Or investors might access private equity through a private equity fund that buys a closely held company and targets turning it around in a period of several years at a profit. Private equity investments are also available through funds of funds or secondary funds.

Because transparency is important, one industry spokesperson recently said that private investment products could be structured to provide figures similar to daily valuations offered by other multiasset products.

Real Estate

The two broad forms of real estate investing are equity investing and debt investing.

In real estate equity investing, investors pool their interests with other investors to acquire, develop and operate portfolios of office, retail, apartment, industrial and hotel properties. The returns come from the operating income generated by the rents and from price appreciation.

For real estate debt, the two primary methods of investment are (1) direct lending to other entities that are acquiring or developing real estate, and (2) investing in debt securities backed by real estate assets.

Real estate investments can be made through real estate investment trusts (REITs), open- and closed-end funds, combined funds, limited partnerships and individual properties.

Digital Assets

The executive order identified cryptocurrency as an example of a digital asset. Cryptocurrencies are currencies that are exchanged on the internet and are not issued or guaranteed by a central authority such as a government or a bank.  Transactions are recorded on a blockchain, which is an electronic ledger, and verified by a network of users. Well-known examples of cryptocurrencies are Bitcoin and Ethereum.

There are thousands of cryptocurrencies. Investors can purchase them directly on an exchange or mine for them, which is the process in which a miner uses computers to solve complex math puzzles and collects the currency after correctly solving the problem. Another way to invest in cryptocurrencies is to purchase an investment trust, which is like a mutual fund, but is only open to accredited investors.

Commodities

Commodities are basic goods used in commerce that are interchangeable with other goods of the same type. They can include agricultural goods, such as crops and livestock; natural resources, such as aluminum, copper and gold; and energy products, such as electricity and natural gas.

Investors access commodities through commodity index funds, activity managed commodity funds, buying the stocks of commodity producers and owning physical commodities.

Infrastructure

Infrastructure refers to several types of physical assets, facilities and systems critical to the functioning of local economies. These assets include transportation (e.g., toll roads, airports and railroads), energy (e.g., pipelines and storage facilities), utilities (e.g., power generation, fuels and water systems), communication (e.g., cell towers and networks) and social (e.g., schools, hospitals, prisons and other public buildings).

Methods of investing include direct investment, private partnerships and listed infrastructure funds.

Lifetime Income Investment Strategies

The order specifically identifies longevity risk-sharing pools as an example of a strategy.

In an August article, “Trump order opens door for modern tontines in 401(k) plans,” (subscription may be required) Pensions & Investments states that retirement industry sources are interpreting longevity risk-sharing as “effectively describing tontines.”

A 2022 report from Milliman defines a tontine as a pooled fund that pays benefits to its participants and as participants die, the remaining fund in the pool are reallocated to the remaining participants. The report further describes what a longevity pooling component in an individual account would look like: “A group of sufficient size could effectively add a pooling concept to mitigate longevity risk. Under this structure, upon death some or all of an individual’s account is allocated to a fund to provide longevity protection for the remaining participants. This works like an insurance plan, while avoiding annuity contract purchase fees.”

Resources

“All That Glitters: Advising Benefit Plans on Cryptocurrency Investments” by Anusha Rasalingam, Benefits Magazine, September/October 2022.

“Alternative Assets: Private Equity,” presentation by Jeffrey Sung, CFA, and Elizabeth Traxler. 70th Annual Employee Benefits conference International Foundation of Employee Benefit Plans.

“Cryptoassets; A Viable Asset for Pension Funds?” By Gregory Leonberger and Brandon Van Feldt, Benefits Magazine, February 2020.

Trustee Handbook: A Guide to Labor-Management Employee Benefit Plans, Revised Eighth Edition.