Overview
On August 7, 2025, President Trump issued an executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors.”
The order seeks to clarify the obligations of Employee Retirement Income Security Act (ERISA) plan fiduciaries when considering alternative assets as potential investment options for employer-sponsored defined contribution plans, as well as to mitigate litigation risk that currently may inhibit plan fiduciaries from including such investment options on the plan’s investment menu.
In Depth
The order considers the use of alternative assets within asset allocation funds offered as investment options under defined contribution plans. Notably, the order does not direct federal regulatory agencies to consider issues with defined contribution plans offering participants the opportunity to invest directly in alternative assets.
Neither ERISA nor other current law prohibits retirement plans from investing in alternative assets. In fact, the US Department of Labor (DOL) issued an information letter in 1996 addressing its views on investing pension plan assets in derivatives. The information letter notes that plan fiduciaries considering investments in derivatives must “engage in the same general procedures and undertake the same type of analysis that they would in making any other investment decision.” The guidelines set forth in the information letter for derivatives as a form of complex investments may provide a helpful framework for future guidance on investing in alternative assets.
The limited use of alternative assets by defined contribution plans is largely due to market practice focusing on mutual funds and other collective investments. Alternative assets can present a number of challenges for retirement plans when compared to traditional retirement plan investment options, including liquidity constraints, infrequent valuations, and higher fees.
Multiple options for asset allocation funds with investments in alternative assets have been in development by recognized names in the retirement plan industry and well-known alternative asset fund managers. Expected interest in such funds will lead to additional options. Some of these options are designed to be target retirement date funds that could serve as a plan’s qualified default investment alternative. As these funds become available for retirement plan investments in the coming months, additional guidance from the DOL and the Securities and Exchange Commission (SEC) should assist plan fiduciaries in understanding how to satisfy their heighted duties to plan participants and beneficiaries as they consider adding such funds to the investment menus of their 401(k) and 403(b) plans.
Directives for regulatory agencies
The order directs the DOL to issue guidance within 180 days to clarify the process that plan fiduciaries should follow when offering asset allocation funds containing investments in alternative assets. The guidance must clarify the duties a fiduciary owes to plan participants in connection with offering such funds, including potential safe harbors. In addition, the guidance must identify criteria that a plan fiduciary should consider when balancing potentially higher fees for alternative assets with long-term return and diversification objectives.
The DOL is also directed to review its past and present guidance and consider whether to rescind its 2021 guidance titled “Supplemental Private Equity Statement.” Issued by the DOL under the Biden administration, the 2021 guidance attempted to limit the scope of a 2020 information letter issued by the DOL under the previous Trump administration that encouraged use of private equity investments for defined contribution plans. In response to the order, on August 12, 2025, the DOL rescinded the 2021 guidance and thereby restored the 2020 information letter.
The order directs the DOL to consult with the SEC, the US Department of the Treasury, and other federal agencies to carry out its objectives. The SEC is directed to work with the DOL to consider means to allow participants in defined contribution plans to invest in alternative assets, including changes to the SEC’s guidance for accredited investors and qualified purchasers.
Alternative assets defined
Alternative assets are defined broadly in the order to include the following:
- Private market investments, such as 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 to finance infrastructure development
- Lifetime income investment strategies, including longevity risk-sharing pools
Common challenges for plans
Alternative assets present several key challenges for plan fiduciaries that the federal regulatory agencies need to address.
Defined contribution plans allow participants to access their retirement savings immediately upon termination of employment. Regulatory guidance on how to address liquidity constraints common to alternative assets is needed because limiting access to retirement savings based on liquidity timing of alternative asset investment options may violate current law and plan terms. Liquidity constraints also prevent plan participants from changing investment elections and moving assets between a plan’s investment options on a daily basis, as is typical for defined contribution plans. Liquidity concerns may be one reason the order focuses on the use of alternative assets within asset allocation funds: Such funds may hold cash or other liquid investments that can be used for distributions to participants needing immediate access to their retirement savings while also holding alternative assets as long-term investments for participants who are many years away from retirement.
Another challenge with utilizing alternative assets for defined contribution plans is valuation frequency. Investment in alternative assets can prevent plan participants from monitoring the growth of their retirement savings in real time, as most alternative assets are valued annually, unlike the stock and mutual fund investments typically offered in defined contribution plans, which are valued in real-time.
Finally, fees have become an increasingly critical focus for plan fiduciaries. Alternative assets typically require higher fees that must be benchmarked and balanced against the potential for greater long-term investment results.
ERISA considerations for alternative asset funds
When an alternative asset fund holds assets of a retirement plan subject to ERISA, the underlying assets of the fund are deemed to be ERISA plan assets unless one of three exceptions applies. The most commonly used exception is for alternative asset funds to prohibit ERISA retirement plans from owning 25% or more of the value of any class of equity in the fund. The other exceptions apply to funds designed as venture capital operating companies (VCOCs) or real estate operating companies (REOCs). To avoid becoming subject to ERISA and its complex rules, nearly all alternative asset funds with retirement plan investors are designed to comply with one of these exceptions.
Next steps
Plan fiduciaries and alternative asset fund managers should continue to monitor guidance from the DOL, SEC, and other federal regulatory agencies related to the use of alternative investments by 401(k) and 403(b) plans.
If you have questions about the order, please contact your regular McDermott Will & Schulte lawyer or the authors of this client alert.
