Every so often, a policy shift in retirement plan compliance, fiduciary oversight or financial reporting emerges that has the potential to reshape retirement planning — the latest comes in the form of an executive order. President Trump's recent executive order, Democratizing Access to Alternative Assets for 401(k) Investors, directs the Department of Labor to explore ways to make alternative investments, such as private equity, real estate and even cryptocurrency, more accessible within 401(k) plans. While it does not change existing laws, it signals a move in how retirement savings could be managed going forward.

 

WHAT ALTERNATIVE INVESTMENTS IN 401(K) PLANS COULD MEAN FOR RETIREMENT PLAN AUDITS

Proponents of the order argue that alternative assets offer stronger long-term returns and diversification benefits. Public pension funds have long used these vehicles, and expanding access to the $12.2 trillion held in retirement accounts could democratize those benefits.

However, this would present challenges to organizations’ retirement plan audits, such as:

  • Transparency and Valuation: Unlike publicly traded securities, private equity and real estate investments lack real-time pricing and standardized disclosures. This lack of clarity could complicate plan audits and increase the risk of valuation disputes
  • Liquidity Concerns: Alternative assets are typically illiquid. Participants may not be able to access their funds quickly, which could lead to participant dissatisfaction or even litigation if expectations are not properly managed
  • Fee Structures: Higher fees often come with private equity and similar investments. These fees can erode returns and expose plan sponsors to “excessive fee” lawsuits, a growing area of litigation in the retirement space

 

HOW PLAN SPONSORS AND FIDUCIARIES CAN PREPARE 

Plan sponsors and fiduciaries are possibly now facing a more complex investment landscape. Under ERISA, plan sponsors and fiduciaries must act prudently and solely in the interest of plan participants. Introducing alternative assets would raise the bar for due diligence, manager selection and ongoing monitoring.

Organizations’ retirement plan sponsors should anticipate increased scrutiny around:

  • Investment committee minutes and decision-making processes
  • Fee disclosures and benchmarking
  • Participant education and communication strategies

 

ACTION STEPS FOR PLAN SPONSORS TO TAKE

In the event that alternative investments do become part of 401(k) plans or if organizations are considering incorporating them regardless of what the Department of Labor determines, plan sponsors can take these steps:

  • Engage Experts: Work with investment consultants and legal counsel to evaluate the prudence of these options
  • Document Everything: Ensure that all decisions are well-documented and supported by thorough analysis
  • Educate Participants: Transparency and education are key. Participants must understand the risks, fees and liquidity constraints of these investments
  • Audit Readiness: Prepare for more complex audits and ensure recordkeeping systems can handle the nuances of alternative asset reporting

President Trump’s executive order may open new doors for retirement savers, but it also could complicate reporting for plan sponsors and fiduciaries. The role of auditors will be critical in keeping these plans compliant, transparent and aligned with participants’ best interests. With careful planning and a commitment to fiduciary excellence, plan sponsors and their auditors can adapt to new shifts in retirement plan policy. Learn more by talking with one of GHJ’s employee benefit plan audit professionals.