How Your 401(k) Could Be Affected by the Labor Department’s Plan To Include Crypto, Real Estate, and Private Equity

Americans' 401(k) accounts may soon have more options to diversify under a Department of Labor plan.

The Labor Department has proposed allowing 401(k) plans to include other assets, such as real estate and cryptocurrency.

The suggested change comes after President Donald Trump signed an executive order last August which required the Labor Department and the Securities and Exchange Commission to expand its alternative assets.

"This proposed rule will show how plans can consider products that better reflect the investment landscape as it exists today," said U.S. Secretary of Labor Lori Chavez-DeRemer. "This greater diversity will drive innovation and result in a major win for American workers, retirees, and their families."

“Americans’ ability to participate more fully in innovation and economic growth through well-diversified long-term investments is a vitally important priority for effective retirement planning," said SEC Chairman Paul S. Atkins.

What this means

Under the proposed rule, when selecting investment alternatives, plan fiduciaries (a person with legal authority to act in someone else's best interest) would need to objectively, thoroughly, and analytically consider, and make determinations on factors including performance, fees, liquidity, valuation, performance benchmarks, and complexity. 

"The significance is not the rule itself but the litigation and fee exposure it creates. Safe harbors protect fiduciaries who follow the prescribed process, but the process demands objective analysis of performance benchmarks, fees, and liquidity—which the fund administrators are often reluctant to provide without an NDA," Chad Cummings, attorney and certified public accountant with Cummings & Cummings Law, tells Realtor.com®.

For retirees, the proposed rule may open up more opportunities for high earners away from traditional funds or markets and offer higher returns, but it comes with its own set of risks.

"This rule is helpful in that it acknowledges reality: Middle-class wealth management has evolved beyond 'just' stocks and bonds, but 401(k) infrastructure cannot yet support it," says Cummings.

"Most record keepers lack the systems to custody, value, or provide daily liquidity for private credit or real assets. Participants who need hardship withdrawals from illiquid positions will discover that 'access' does not mean 'availability.' This will be a stumbling block for many plan participants."

Cummings explains the rule does not change how 401(k) participants file taxes, but it creates valuation chaos that will.

"Alternative investments like private equity and hedge funds lack daily market pricing. They are, by their very nature, opaque, not transparent," Cummings explains. "When a participant takes a distribution or reaches required minimum distribution age, the plan must assign a fair market value to illiquid holdings.

"I tell my clients that a disputed valuation on a $200,000 private equity allocation could invite IRS review because the tax return is only as good as the valuation, and these valuations will invite scrutiny."

The proposed rule is subject to further review, including a 60-day public comment period, before it can be finalized.

Cummings advises to do nothing until a final rule publishes, and then scrutinize any plan amendment for up periods, fee layering, and valuation methodology..

"Finally, let's ask the question: who benefits? Asset managers and fund sponsors benefit from $13.8 trillion in retirement assets flowing into higher-fee products," Cummings adds. "Follow the money, as always. Whether or not plan participants will ultimately benefit from this is questionable at best—at least until we have clearer guidance."