Your 401(k) Could Soon Hold Crypto and Private Equity. Is It a Good Idea?

For decades, the recipe for a standard 401(k) has been simple and reliable: a mix of stocks and bonds. This straightforward approach has helped millions of Americans build wealth for retirement. Now, a major shift could be on the horizon.

An executive order signed by former President Trump has directed federal agencies, including the Department of Labor and the SEC, to pave the way for a new class of investments—known as “alternative assets”—to be included in 401(k) and other employer-sponsored retirement plans. This move could soon allow everyday investors to put their retirement savings into complex assets like cryptocurrency, real estate, and private equity, which were once the exclusive domain of large institutions and the ultra-wealthy.

While proponents call it a “democratization” of investing, financial experts are urging caution, pointing to a minefield of potential risks that could catch inexperienced investors off guard.

Key Takeaways: What You Need to Know

• What’s Changing: An executive order is encouraging regulators to make it easier for employers to offer alternative assets like cryptocurrency and private equity in 401(k) plans.

• The “Pro” Argument: This move could give everyday savers access to investment opportunities that have historically generated high returns for wealthy investors and large institutions.

• The “Con” Argument: These assets come with significant drawbacks, including extremely high fees, a lack of transparency, long lock-up periods, and high volatility, especially with crypto.

• Expert Consensus: Financial advisors and academics largely recommend extreme caution. Many suggest that traditional, low-cost index funds remain the safest and most effective choice for the average retirement saver.

• Regulatory Back-and-Forth: The Trump administration’s move rescinds previous guidance from the Biden administration, which had explicitly warned plan administrators against including cryptocurrencies in 401(k)s due to their speculative nature.

What Are Alternative Assets? A Look at Private Equity and Crypto

To understand the potential changes to your 401(k), it’s important to know what these new assets are and how they differ from traditional stocks and bonds.

Private Equity: High Stakes, High Fees

Private equity firms pool money from investors to buy companies, often those that are struggling or not publicly traded. Their goal is to restructure and improve the business, then sell it for a substantial profit.

• The Success Stories: A successful turnaround can lead to massive returns.

• The Failures: In other cases, the target company is loaded with debt and driven into bankruptcy, as famously happened with Toys R Us.

“There’s a bit of democratization here, of making what were private exclusive investments to the wealthy available to everybody,” says Lisa Kirchenbauer, founding partner at Omega Wealth Management. “But, you know, that doesn’t mean you’re getting the kind of stuff that has made other people wealthy.”

Kirchenbauer raises a crucial point: the best private equity deals may still be reserved for premier clients, leaving 401(k) investors with less attractive, higher-risk opportunities.

Cryptocurrency: The Wild West of Investing

Cryptocurrencies like Bitcoin and Ethereum are digital assets known for their extreme price volatility and a largely unregulated market. While some investors have made fortunes, many others have suffered devastating losses. The Biden administration previously issued a stern warning about including crypto in retirement plans, citing risks of fraud, theft, and its highly speculative nature.

The Big Red Flags: Why Experts Are Concerned

While no law explicitly forbids these assets in a 401(k), plan administrators—your employer—have traditionally avoided them for several compelling reasons. Under a federal law known as ERISA, employers have a fiduciary duty to act in their employees’ best financial interests. Breaching this duty can lead to costly lawsuits.

Here are the primary risks associated with adding alternative assets to your 401(k):

1. Exorbitant Fees: Private equity funds are notorious for high fees, typically charging 2% of assets under management and 20% of any profits (known as “2 and 20”). These fees can dramatically eat into your long-term returns compared to low-cost index funds, which often have fees below 0.1%. “The fees for private equity are simply too high to make them a good choice for the typical retirement fund,” warns Jeff Hooke, a senior finance lecturer at Johns Hopkins University.

2. Lack of Liquidity: Unlike stocks, which can be sold any time the market is open, private equity investments are “illiquid.” Your money is often locked up for a decade or more. This could be a serious problem if you need to access your funds, change jobs and want to roll over your 401(k), or are nearing retirement.

3. High Risk and Volatility: The performance of private equity can be inconsistent. “The track record for the last ten or 12 years has been mediocre at best,” Hooke adds. Cryptocurrency, meanwhile, is one of the most volatile asset classes in the world, making it a particularly risky choice for essential retirement savings.

4. Complexity and Lack of Transparency: These are not simple investments. It is difficult for the average person to properly vet a private equity fund or understand the underlying technology and market forces driving cryptocurrency prices.

What Should You Do? A Prudent Path Forward

While the landscape is changing, the fundamental principles of sound retirement planning remain the same. The arrival of these new options doesn’t mean you have to use them.

For most people, the expert advice is clear: stick with the basics. “You’re protected from high fees and you’re principally guaranteed to return what the market does,” says Hooke, recommending traditional stock and bond index funds. With the S&P 500 consistently performing well, tracking the market with a low-cost fund is a powerful and proven strategy for building long-term wealth.

For those who are younger, have a high-risk tolerance, and are determined to explore these assets, Lisa Kirchenbauer suggests a disciplined approach: limit your allocation to no more than 5% or 10% of your total portfolio.

Ultimately, while the promise of accessing elite investments is enticing, the associated risks and costs may far outweigh the potential rewards for the average retirement saver. Before making any changes, it is crucial to do your research and consider consulting with a qualified financial advisor.