The U.S. Department of Labor has proposed a new rule that could allow 401(k) plans to include riskier investments, such as private credit and cryptocurrency, in their portfolios. This move has sparked concern among some investor advocates, who worry that it could put the retirement savings of millions of Americans at risk. As of January 2023, there were over 600,000 401(k) plans in the United States, covering more than 60 million active participants, with total assets of over $7 trillion.
“There was a sense of unfolding,” said Lori Lucas, president and CEO of the Employee Benefit Research Institute in Washington, D.C., describing the potential impact of the proposed rule on the retirement savings landscape.
The proposed rule, which was announced on January 27, 2023, aims to provide plan sponsors with more flexibility in terms of the types of investments they can offer to participants. However, some critics argue that this flexibility could come at a cost, as riskier investments can be more volatile and may not be suitable for all investors. For example, the price of Bitcoin, a popular cryptocurrency, has fluctuated wildly over the past year, with a peak price of over $64,000 in April 2021 and a low of around $29,000 in July 2021.
According to a report by the Investment Company Institute, the average 401(k) plan had a total of 18 investment options in 2020, with an average of 4.5 core options, such as large-cap U.S. equity funds, and 13.5 non-core options, such as international equity funds or alternative investments. The proposed rule could potentially increase the number of non-core options available to participants, which could lead to a more complex investment landscape.
The Department of Labor has stated that the proposed rule is intended to provide plan sponsors with more flexibility in terms of the types of investments they can offer to participants. However, some critics argue that this flexibility could come at a cost, as riskier investments can be more volatile and may not be suitable for all investors. Risk management will be key for plan sponsors and participants alike, as they navigate the potential changes to the 401(k) investment landscape.
Here are some key facts about the proposed rule:
- The proposed rule was announced on January 27, 2023
- The rule aims to provide plan sponsors with more flexibility in terms of the types of investments they can offer to participants
- The rule could potentially increase the number of non-core options available to participants
As the proposed rule moves forward, it is likely that there will be significant debate about the potential risks and benefits of allowing riskier investments in 401(k) plans. Participants and plan sponsors will need to carefully consider their investment options and asset allocation strategies in order to manage risk and achieve their retirement goals. What happens next will depend on the outcome of the public comment period, which is currently underway, and the final rule, which is expected to be issued later this year.