Last week (August 7) President Trump signed an executive order that helps facilitate US pension funds — including the popular 401ks — to boost investments into private market assets, including cryptocurrencies.
Given there is some $12.5 trillion invested in US pension funds this could open the door to significant funds flowing into a range of alternative assets, from venture capital and private equity to real estate as well as Bitcoin and other cryptocurrencies.
Signing the executive order, Trump said this will “relieve the regulatory burdens and litigation risk that impede American workers’ retirement accounts from achieving the competitive returns and asset diversification necessary to secure a dignified, comfortable retirement.”
Pension experts on both sides of the Atlantic have observed that this appears to be broadly similar to the direction of regulatory travel in the UK. Here, the Mansion House Compact, followed by the Chancellor’s Mansion House Accord have sought to boost investment from workplace DC schemes into private assets — with the latter specifically targeting UK assets to help drive domestic economic growth.
But while there are similarities, there are also key differences: Rachel Reeves does not seem as keen on promoting more volatile cryptocurrencies as an investment option for the millions of workers in auto-enrolment pensions. In the US much of the commentary has focused on this particular alternative asset. There have also been concerns voiced that Trump’s personal business interests include firms involved in the crypto market.
Trump’s executive order directed the US Securities and Exchange Commission (SEC), Labor Department , and Treasury to review current rules to allow those investing in these retirement plans to have access to these alternative assets. He says he wants any change to the rules updated within 180 days. This could see the current 15 per cent limit on less liquid assets lifted, as well as confirmation that these schemes can invest in a wider range of assets.
Despite Trump’s push for rapid change, there is some scepticism as to the immediate impact this will have on investment portfolios in the US.
Pitchbook, a Morningstar company that provides performance and other data on the private markets sector, said it does not think this order will overcome all of the barriers that have, to date, prevented employer 401k committees from embracing alternative assets.
In an analyst’s note on this latest presidential order Pitchbook said: “This executive order may remove some of the objections employers have had around incorporating private assets into 401k options, particularly concerns around litigation. But it may not be enough to overcome inertia and cost concerns of employer 401k committees.”
Pitchbook goes on to say that while “asset managers are salivating over the idea of tapping into a portion of the $12.5 trillion in defined contribution assets, we believe adoption will be slow due to cost, transparency, and complexity.”
It adds that venture capital will be “particularly problematic” to incorporate into US retirement funds, because the best fund managers in this sector may not want the burdens of having regulated funds as investors.
This perhaps echoes some of the concerns that have been expressed in the UK — with concerns that the cost restraints on workplace DC schemes may mean they are less inclined to pay the performance fees that are common in the VC and private equity space. As a result some are concerned that DC schemes will miss out on the most sought-after and potentially the higher-quality investments in this sector.
An additional complication in the US is the prospect of lawsuits from disgruntled employers or employees if returns are not as expected. This has certainly been seen when it comes to ESG or sustainable investments — with lawsuits aimed at providers in some Republican-run states against providers for pursuing ESG objectives, and in turn , other legal action against providers for not taking such issues into account when devising an investment strategy.
Ted Rossman, a senior industry analyst at Bankrate, says this is likely to impact take-up of private market assets in 401k funds. “It’s going to be slow going. A lot of providers are reluctant to be early adopters here. They’re worried about potential costs and maybe lawsuits or other consequences.”
He adds that while some private investments were allowed in retirement accounts back in 2020 , they are still not currently widely available. If providers have tended to stick to lower-cost equity index funds to date, they may not change tack just because cryptocurrency assets are now “permitted”.
Liquidity questions
As in the UK market, one of the main issues about incorporating a whole range of private markets into retirement plans is liquidity. As Pitchbook points out, these retirement funds differ from typical investment accounts in that dollars flow into investment products every pay period, and employees are allowed to change their allocations, sometimes on a daily basis.
It says: “This requires that 401k fund options must have enough liquidity to allow for frequent redemptions and must have a place to put frequent inflows. A fund that was 100 per cent private markets would not be well suited to these sorts of cash flows, as the money coming in every pay period may not coincide with the fund manager identifying a new investment opportunity in the form of the acquisition of a portion or a controlling interest in a company.
“It is not as simple to put cash to work in a private equity fund as it is in a stock fund, and funding redemptions is even harder, as large-scale requests to sell out of a fund are difficult to accede to when it involves selling a whole company rather than just some shares of stock.”
Pitchbook explains that this is why the SEC has had rules that limit illiquid investments in mutual funds to just 15 per cent — ensuring a high level of liquidity during normal market conditions.
Pitchbook added that as in the UK, target-date funds are popular within employers’ retirement plans. This order will allow 15 per cent is then invested in venture capital, private equity and private debt. It says: “Many employers now automatically enrol new employees into a target-date option unless the employee opts out or opts into something else. Having this as the default option means money could start pouring into these vehicles without employees having to make a conscious decision.
“What remains to be seen is if the funds offering these sleeves will be new funds, or if asset managers will add private markets into existing funds. If added to current funds, the adoption could be quick, as the assets in target-date funds will automatically be shifted into private assets. There is an argument, however, that the opportunity to educate employees on what they are investing in would be subverted through this approach, and the track record of the fund will not reflect the new investment scope. If new funds are created, then they will definitely not have a track record, and the adoption will be much slower, as each employer will need to be convinced that this is a better option than they currently have.”
M&A activity
Pitchbook also notes that the 401k market is currently concentrated. “[Employers] have appreciated the cost savings of platforms from Vanguard, BlackRock, T. Rowe Price, Capital Group, and Fidelity Investments, which in 2023 accounted for around 81 per cent of target-date assets.”
It adds that none of these asset managers have built their reputations on private market investing — so it expects to see partnerships and potential M&A activity between these managers and those hailing from the private market arena, to help meet demand for wider asset allocations over time.
It could be argued that this consolidation and M&A activity has already started in the UK. In recent years Schroders, for example, has acquired Greencoat, an infrastructure manager with a particular focus on the renewable sector. Schroders is already leveraging this expertise to launch new LTAFs, which are being utilised by master trusts and DC schemes to gain access to private markets.
Talking about the potential for market activity in the US, Pitchbook adds: “As target-date funds tend to be funds of funds — rather than holding direct stocks, bonds, or other assets themselves — a shift to private market investing could suddenly create some very powerful LPs as these public asset managers decide which funds to use in their target-date products.”
Concerns about education, cost and the potential performance of these illiquid assets are amplified if a sizeable chunk of this illiquid allocation goes into cryptocurrency. Much of the commentary around this executive order in the US has focused specifically on this asset class.
In an interview with ABC News, Vanguard, one of the largest retirement plan providers, said private assets could offer broader diversification and potentially higher returns for investors with the right risk tolerance and long-term outlook. However, the asset managers emphasised the importance of “educating retirement investors to ensure a clear understanding of the opportunities and risks of investing in private assets.”
Barnett Waddingham chief investment officer Matt Tickle says: “Both the UK and US want DC assets working harder in private markets, but they’re taking very different routes.
“The UK is setting clear targets and threatening mandation – whilst steering clear of crypto – while the US is removing barriers and leaving the door open to digital assets. Diversification can boost member outcomes. However, we do not believe bitcoin is a suitable investment for UK pension schemes.”