President Trump’s Executive Order on alternative assets for U.S. defined-contribution retirement plans—and what it means for the secondaries market

Background

401(k) plans are employer-sponsored retirement vehicles that offer participating employees with an array of investment options to choose from. Historically, 401(k) plan fiduciaries were reluctant to include alternative asset strategies in the line-up of investment options for the plan participants, due in large part to the regulatory constraints imposed by the Employee Retirement Income Security Act of 1974, as amended (ERISA).

Among other things, the ERISA safe harbor provisions that protect plan fiduciaries from liability for investment losses require that each investment alternative provide appropriate liquidity. This has resulted in 401(k) plans typically offering investment options with daily liquidity, such as open-ended registered mutual funds. Registered funds are subject to securities law requirements on liquidity that make illiquid alternative asset strategies generally incompatible. It is possible to offer alternative asset strategies through certain unregistered funds, such as bank collective funds or collective investment trusts (CITs); however, these vehicles and their managers are subject to the fiduciary responsibility and prohibited transaction rules of ERISA, which could be challenging to comply with for managers of alternative investments.
 

 
Further—even if offering alternative assets as a sleeve in CITs is commercially viable, notwithstanding the ERISA requirements—401(k) plan sponsors may still be hesitant to offer investment products that include alternative asset classes. Alternative asset strategies tend to carry higher fees, which exposes plan sponsors to significant risks of lawsuits alleging, among other things, that it was imprudent to select an investment option that charged higher fees than a comparable investment option.

The Executive Order

The Executive Order does not purport to alter the substantive requirements under ERISA. Rather, it re-affirms that 401(k) plan fiduciaries are held to a high standard of prudence under ERISA and must carefully consider all aspects of alternative asset strategies, including the asset manager’s capabilities and the potential for higher long-term net returns and diversification opportunities for plan participants. Nonetheless, the Executive Order is a significant affirmative step towards creating an environment that facilitates 401(k) plan participants’ access to alternative asset investments. Specifically, the Executive Order directs the U.S. Department of Labor (the DOL) to seek to clarify, within 180 days, its position on alternative assets and the appropriate fiduciary process for offering asset allocation funds (such as the prevalent target date funds, or TDFs) that contain alternative investment strategies. In doing so, the Executive Order also instructs the DOL to propose rules, regulations or guidance, including any appropriate safe harbors, that clarify the duties of a 401(k) plan fiduciary in considering an asset allocation fund that includes investments in alternative assets, and to prioritize actions that may curb ERISA litigation.

The Executive Order also instructs the SEC to consult with the DOL to consider ways to facilitate access to alternative asset investments by 401(k) plan participants, calling out specifically potential revisions to existing SEC guidance on “accredited investor” and “qualified purchaser” status based on individual financial status, which prevents 401(k) plans from offering broader access to alternative asset classes for all plan participants.

What’s next?

In terms of market consequences, an important potential impact of the Executive Order and the expanded access for 401(k) plans to alternative assets could be significant additional capital inflows into the secondaries space in the years ahead. As we have previously mentioned in our article, “Secondaries in 2025: building on a record year”, secondaries help mitigate the J-curve and offer important diversification, making private asset classes a particularly attractive one for retail investors.

In addition, LP-led secondaries offer built-in diversification by providing access to a pre-existing and diversified portfolio of private asset class exposure. Registered funds and other targeted evergreen products have already had significant success in this area in recent years and continue to drive growth in fundraising and transaction volumes. Diversified exposure to portfolios of fund interests would help provide attractive private market exposure to retail investors, including the 401(k) plan participants, which could drive LP-led secondaries and multi-asset continuation funds, given their diversified risk profile and reduced volatility. 401(k) plans may be attracted by this risk profile and asset mix as a way to quickly obtain exposure for their participants to alternative asset classes to complement their existing public market exposure (not unlike the diversified exposure to public equities achieved by individual investors through acquiring a market tracker ETF).

It remains to be seen how strong a tailwind this development will be for the secondaries space, but based on initial indications, it is possible that the secondaries market may be one of the primary beneficiaries of the expanded retail access expected to follow from the Executive Order.