The Retired Investor: Additional 401(k) Investment Choices May Be Coming Your Way

If President Trump has his way, investments in private equity, real estate, and even digital assets will soon be allowed in your 401(k). As in everything, there are risks and rewards in this proposition.

 

Last week, Donald Trump ordered the Labor Department to examine his proposal. The new investments, aside from your 401(k), would also apply to other defined benefit plans. These are America's primary vehicles for retirement savings.

 

How much money are we talking about? As of the first quarter of 2025, 90 million Americans held $12.2 trillion in 401(k) plans alone. That is not counting the $8.9 trillion in federal, state, and local government plans.

 

Today, most of that money is invested in either stocks or bonds, but the pool of investments offered to the public is shrinking. More companies are going private as regulations, disclosure requirements, litigation, and compliance costs increasingly interfere with the job of creating products, making profits, and increasing sales. Over half the 8,000 companies that existed in 1996 have concluded that going private is a far better proposition.

 

"Going public" used to be the primary method of raising capital for growing companies. Not today. Dozens of companies now tap private funding sources for their financing needs. Technology and AI companies, like SpaceX and OpenAI, with more than $400-$500 billion in capital, consistently raise capital in the private equity markets. Over the last two decades, the number of companies tapping this source of funds has grown from 2,000 to more than 11,500. As a result, equity and private credit funds have skyrocketed with assets greater than $8 trillion, which is a $5 trillion gain over the past 10 decades.

 

Defined benefit plans, unlike your 401(k) or 403(b), guarantee an annual payout to retirees. That means the professionals who manage this money need to perform consistently. In a bid to do just that, plan sponsors have been investing substantial sums in alternative assets for at least the last 30 years.

 

Those bets have paid off. They have outperformed the typical 401(k) by almost 30 percent over that time. The main driver of that performance has been their investments in private equity and private credit funds. However, most investors have been shut out of this market. Only about one-third of those saving for retirement can participate in these plans.

 

However, the private equity industry is facing a slowdown. The appetite for investing in private companies has been waning among the institutional crowd. It is a mature industry where the lion's share of money has already been made. Private equity buyers are worried that they might not be able to offload these investments in a saturated market. To grow, managers need to tap new markets for their funds. The employee retirement market is a tempting market for them. 

 

On a different front, the presidential order also includes crypto investments and real estate. These are two areas the president knows something about. Over the last nine months, the president and his family have dived into the crypto market with both feet. He has made about $1 billion on crypto since then, lifting his net worth to around $5.6 billion. Most of the rest of his wealth is in commercial real estate. While the real estate market has been nothing to write home about lately in the commercial market, home prices have skyrocketed since the COVID pandemic.

 

As for cryptocurrencies, both Bitcoin and Ethereum have been on a tear. New rules and regulations offer investors much greater safeguards, and the creation of stablecoins sets the stage for a much greater use of digital assets over time. Next week, we examine the risks involved in these investments

 

CORRECTION TO LAST WEEK'S COLUMN

 

Several readers notified me during the week of an error in my column "Trump Accounts Could Be Seed Money For America's Future Generations."

 

I wrote that under the recent passage of the government's tax and spending bill, beginning in 2025, each newborn American would receive $1,000 into a tax-deferred investment account that will grow tax-free until retirement. My error was in computing how much that seed money would be worth by the time of retirement at age 68.

 

I wrote, "The short answer is $1,029,500, assuming you invested the money in the S&P 500 Index at an annual average return of 6 percent and were not allowed to touch it until you retired at age 68." That is incorrect. If only the $1,000 were contributed and nothing more through the years to retirement, the total would be a little over $50,000. However, if family, friends, or employers continued to contribute $1,000 per year (as the government hopes), which I did not make clear, then the total would be more than one million dollars by retirement. "In one fell swoop, that could solve the Social Security issue facing future U.S. generations." I apologize for the error.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.