Your 401(K) is About to Get a Boost From Alternative Assets. Here's What Investors Need to Know

President Donald Trump’s latest executive order could mark a turning point for retirement savings by potentially allowing alternative assets to be included in 401(k) plans. However, what that looks like in practice and how complex the process will be remains uncertain.

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Signed on Thursday, the order instructs the Secretary of Labor to revisit fiduciary rules for incorporating alternative investments such as private equity, private credit, hedge funds, real estate, and even cryptocurrencies into 401(k)s and other defined-contribution plans regulated under the Employee Retirement Income Security Act of 1974 (ERISA).

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While the idea sounds exciting for diversification, adding alternative assets to retirement plans comes with challenges, including liquidity constraints, transparency issues, and higher fees.

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Investors shouldn’t expect these options to appear overnight. Employer-sponsored retirement plans tend to move slowly, even without added complexity, said Jason Kephart, senior principal for multi-asset strategy ratings at Morningstar.

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“We’re still in the very early stages,” Kephart explained. “It’s going to take multiple quarters for plan sponsors to review, approve, and get comfortable with these investments if they decide to offer them at all.”

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As of Q1, defined contribution plans including 401(k)s and 403(b)s held $12.2 trillion in assets, with roughly $8.7 trillion in 401(k)s alone, according to the Investment Company Institute.

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Bonnie Treichel, ERISA attorney and founder of Endeavor Retirement, believes it’s inevitable that alternatives like private credit, real estate, and crypto will eventually find their way into defined-contribution plans. But the responsibility lies with fiduciaries both advisors and plan sponsors to carefully vet these options before making them available.

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“The role of a plan sponsor is to create an investment menu that serves participants’ best interests,” Treichel said. “That means considering what fits each plan’s unique needs there’s no universal formula.”

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Treichel anticipates alternatives will first appear as components of managed accounts or target-date funds, rather than as standalone investment choices. “You’re not going to see participants directing 20% of their plan into a hedge fund,” she said. “Instead, alternatives would be a small slice of a larger, professionally managed portfolio.”

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Jania Stout, president of retirement and wellness at Prime Capital Financial, shares that view. She expects alternatives will likely be housed inside target-date funds or managed accounts, where professional oversight can help manage risk.

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“That structure gives plan sponsors more confidence than simply adding an alternative fund as another menu option,” Stout noted.

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Kephart agrees, predicting that the first wave of alternative products for 401(k)s will come in the form of collective investment trusts (CITs) pooled investment vehicles exclusive to retirement plans. CITs would likely need to hold significant cash reserves (possibly 20% or more) to address liquidity concerns, which could dilute private market exposure.

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One of the biggest hurdles for alternatives in retirement plans is cost. Private market investments tend to have far higher fees than traditional index-based funds and the true costs aren’t always transparent.

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“Many private funds have incentive fees that match or even exceed the management fee,” Kephart said. “That’s on top of management costs that often start at 1% versus as low as 0.10% for some index target-date funds.”

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If alternatives are introduced, participants who prefer traditional investments will still have options, Treichel said such as target-date funds without alternatives, index strategies, actively managed mutual funds, and possibly a brokerage window.

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Some experts believe additional guardrails may be necessary. Certified financial planner Chuck Failla suggests requiring alternative investors in 401(k)s to be accredited meaning they have at least $1 million in net worth to ensure they understand the risks.

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Others, like Wilmington Trust’s chief investment officer Tony Roth, caution that risk-management strategies could limit returns. For example, using interval funds to manage liquidity constraints might reduce the very premium that makes private investments attractive.

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“The higher returns in private markets are largely compensation for locking up your capital,” Roth explained.

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Despite the challenges, alternatives could offer valuable diversification in a market dominated by large-cap stocks. Many companies now stay private longer, reducing the number of small- and mid-cap stocks available in public markets.

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“There’s significant potential for alpha in private markets,” Roth said. “The key is trusting skilled managers, because the downside risk is just as real as the upside potential.”

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While Trump’s order has opened the door, the path to incorporating alternatives into 401(k)s will likely be gradual, carefully monitored, and shaped by both regulatory guidance and market readiness.

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