On August 7th of 2025, President Trump issued an executive order with the intent to allow defined contribution plans, such as 401(k)s, to include alternative investments as an available investment option in their fund lineups alongside more traditional equity and fixed income funds.
401(k) plans are essential and powerful parts of many retirement strategies. It’s important to understand any changes that impact them and any potential benefits or risks that they may have on your portfolio.
In today’s blog, we want to provide some context for this recent executive order and review the potential benefits and risks for plan participants to consider. As always, we encourage you to reach out to us with any questions that you may have.
Let’s get started!
What are 401(k) Alternative Assets (Investments)?
The changes for 401(k) plans and other similar types of plans are specifically related to alternative asset investments. To start, let’s define what we mean by the term “alternative investments.”
Alternative investments include the following:
- Private market investments, such as private equity funds, hedge funds, and funds that invest in private debt.
- Real estate investments, including investments in debt instruments collateralized by real estate holdings.
- Actively managed investment vehicles that invest in crypto currency
- Commodities
Background and Risk Considerations of 2025 401(k) Changes
It is important to note that the alternative investments for retirement portfolios impacted by the 2025 executive order have been around for many years. However, they share a couple of very important characteristics that, to date, have caused them to be restricted to certain types of investors (known as accredited investors).
These shared characteristics are as follows:
Illiquidity:
With many investments, the harder it is to sell them, the less likely it is that you will get fair market value at the time of sale.
Alternative investments are not actively traded on stock exchanges or the bond market. As a result, it can be difficult to sell these investments on the secondary market without making price concessions and/or incurring added costs.
Between market value concessions that may be required to entice buyers, and commissions and fees, the seller could end up with less cash than they were hoping for if these investments need to be sold prematurely.
Costs:
These types of investments tend to be actively and professionally managed. Therefore, they can tend to carry higher costs than the more popular passive index funds and ETFs that have begun to dominate the market over the last decade or so.
These higher costs dilute investor returns.
Due to the combination of illiquidity and elevated costs, alternative investments have been largely restricted to pension funds, endowment funds and accredited investors.
Potential Benefits of Alternative Investments in Retirement Portfolios
Despite the risks noted above, these types of investments do have some benefit in the context of a well-diversified investment portfolio, especially if your tolerance for risk is high.
The main benefit we will highlight today is the lack of correlation with more traditional stock and bond investments. That lack of correlation creates diversification.
The idea behind diversification is that if one area of the market does poorly, another area of the market may hold steady or outperform.
Therefore, the more uncorrelated an investment behaves (when compared to more traditional stocks and bonds), the more effective the diversification.
As was noted above, alternative investments tend to be uncorrelated to stock and bond markets and can be a good consideration as a diversifier in the context of an entire portfolio; that is, assuming the investor also has a sufficiently long enough time horizon to not need to sell the investment prematurely and a sufficiently high tolerance for risk.
So, How Will This Impact You?
It is unlikely that this executive order will result in alternative investments showing up in your retirement plan fund lineup next quarter.
Most of the popular defined contribution plans are governed by the Employee Retirement Income Security Act (ERISA) and are required to act in the best interests of plan participants. Due to the specific regulations that plan administrators and trustees are required to follow, they will likely wait to allow alternative investments in their fund lineups, especially until the various regulatory bodies clarify their fiduciary obligations under ERISA.
For now, the order instructs the Secretary of Labor to work with the Department of Labor and other regulatory bodies to see if the inclusion of alternative investments is appropriate, while providing a framework for how regulators, plan administrators, and plan trustees can evaluate the appropriateness of including alternative investments in the plans they oversee.
Therefore, while the order presents both potential benefits and risks for investors, the reality is that it’s still early in the process of determining if, how, and when adding alternative investments to retirement portfolios could align with acting in the best interests of plan participants.
The Bottom Line
As you can see, this is a very complex topic and is likely to evolve significantly in the months to come!
The Master’s team will continue to stay informed and up to date on changes. In the meantime, if you own a business that offers a retirement plan to your employees and would like a second opinion on your plan, please reach out to us! We would be happy to help!
