ARI SHAPIRO, HOST:
The funds in most U.S. retirement accounts are pretty basic - stocks and bonds. But what about investing in all kinds of other stuff? That's the idea behind a recent executive order signed by President Trump. It paves the way for the inclusion of crypto, real estate and previously exclusive private equity in 401(k) accounts. NPR personal finance correspondent Laurel Wamsley is here to talk us through it. Hey, Laurel.
LAUREL WAMSLEY, BYLINE: Hey, Ari.
SHAPIRO: Remind us first what's normally in a 401(k) and then how what's proposed here is different.
WAMSLEY: Yeah, 401(k)s and similar accounts are retirement plans offered by employers that workers can contribute money to. As an employee, I choose among several investment options, typically funds composed of publicly traded stocks and bonds. Now, what this executive order aims to do is to lay the groundwork for whole new investment categories that employees could choose from, like funds for crypto or real estate or private equity. It directs different agencies in the federal government to work on this, and it's a signal to the finance industry, too. These kinds of assets are seen as riskier than the funds made of stocks and bonds, though they've obviously made some people very rich.
SHAPIRO: The idea of private equity specifically in 401(k)s has gotten a lot of attention. How would that work?
WAMSLEY: Yeah. Private equity firms are investment companies that buy up companies or assets, often distressed businesses. Sometimes the private equity firm succeeds in turning a company around, and sometimes, like with Toys "R" Us, the company gets loaded with debt and goes bankrupt. The investors in private equity have been large institutions, like universities and state pension plans, as well as very wealthy people. But for regular folks, private equity has not been an option. Making it available to 401(k)s would be a big change, says Lisa Kirchenbauer, founding partner at Omega Wealth Management in Arlington, Virginia.
LISA KIRCHENBAUER: There's a bit of democratization here of making what were private, exclusive investments to the wealthy available to everybody. But, you know, that doesn't mean you're getting the kind of stuff that has made other people wealthy.
WAMSLEY: That's because it'll all depend on which companies or investments are put into these new funds. And she's not convinced these will be the best opportunities, which might still be reserved for wealthier investors.
SHAPIRO: Why haven't these kinds of assets been an option for 401(k)s before?
WAMSLEY: Well, there's no law that forbids it, but there are good reasons to exclude them - higher risk, complexity, lack of transparency and, for private equity, often much higher fees. Which funds are on offer is really up to employers, since they are the administrators of 401(k) plans. And there is a federal law called ERISA that requires them to act in employees' best interests, and it gives workers the right to sue their employers if they fail to do so, which gives employers good reason to stick with the vanilla options of stock and bond funds.
SHAPIRO: So are workers going to start to see a lot more options right away in their retirement accounts?
WAMSLEY: Well, it could, but not right away. New kind of funds have to be developed for the retail market, and that is underway because this is a huge new market for these companies. And experts say these assets might not be well suited for everyone's 401(k). Private equity firms charge really high fees, and you're locked in for long periods of time, like 10 years, which could get messy if you're planning to retire soon or quit jobs - switch jobs, and crypto's highly volatile and loosely regulated.
So Kirchenbauer says you might want to consider making these new assets up to 5- or 10% of your portfolio if you're really into it and retirement's a long ways off. But otherwise, experts say many people might decide they're not worth the risk and effort, and they should just stick to the stock and bond funds.
SHAPIRO: That's NPR's Laurel Wamsley. Thanks.
WAMSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
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