US fund management firms back 401(k) alternative assets proposal, but others worry about risks

By Suzanne McGee

PROVIDENCE, Rhode Island, June 2 (Reuters) – The U.S. fund management industry has thrown its weight behind a proposal to open up retirement plans to alternative assets like private credit and cryptocurrencies to direct a slice of the estimated $14.2 trillion now in 401(k) and other mass-market products into those vehicles. 

More than 33,000 letters from individuals and institutions, including Wall Street and investor advocacy groups, offered a myriad of opinions on the proposed new rule by the Department of Labor by the time the comment period for the proposal drew to a close on Monday. 

Some raised concerns that it would open up workers to excessive risks and high fees on their retirement savings, while others saw opportunities for investors and funds to benefit. 

“Including those funds and assets should alleviate certain regulatory burdens and litigation risk that interfere with the ability of American workers to achieve, through their retirement accounts, the competitive returns and asset diversification necessary to secure a comfortable retirement,” wrote Jennifer Han, chief legal officer of the Managed Funds Association, a trade group that represents the alternative assets industry.

But many others questioned whether the proposal would really benefit individual investors or just favor asset managers trying to tap a large new source of capital.

‘SAFE HARBOR’ FROM INVESTOR LAWSUITS

The proposed rule change would give employers a legal “safe harbor”, or protection from investor lawsuits, as long as they “objectively, thoroughly, and analytically consider, and make determinations on factors including performance, fees, ​liquidity, valuation, performance benchmarks, and complexity” before making the investment, the Labor Department said when announcing the proposal in late March. 

At that time, a Labor Department official said the rule was not intended to direct providers to invest or not but rather give them “the toolkit so that they can follow an analytical, thorough and objective process.”

The review period has now ended, according to the Labor Department’s website. 

The department will now review the thousands of comments it received, may revise the rule, and must complete a White House review before any final rule can be published. That may happen rapidly, since the process now underway was sparked by an executive order from President Donald Trump last August. 

MODEST ALLOCATIONS SUGGESTED

The Investment Company Institute (ICI), which represents asset managers that have been forming new partnerships in anticipation of such a policy change, generally applauded the move. It suggested “modest private market allocations” within the target-date funds that are the default investments for most employer-sponsored 401(k) plans would be the best approach.

Some financial advisers said it would benefit savers. 

“The American economy increasingly lives in private markets and most workers have no access to it,” wrote financial adviser Jarrod Winkcompleck, CEO of Gap Financial Services in Austin, Texas, as he urged policymakers to forge ahead with the proposal.

About 57% of all working Americans who are not covered by government plans have some kind of employer-sponsored retirement savings account, such as a 401(k) plan, according to the Bureau of Labor Statistics. The ICI calculated that as of last year, that pool of capital totaled $14.2 trillion.

SKEPTICISM ON BENEFITS 

The CFA Institute, an investment industry education association, said that while institutions get access to the lowest-fee, highest-quality vehicles because of their market clout, retirement savers will lack “direct control over manager selection, deal access, valuation, liquidity terms or fee arrangements.” 

Indeed, several of the comment letters reviewed by Reuters emphasized their authors’ concern about the structure of the funds to which they will have access.

Michael McCormick, chief investment officer at Centric Wealth Management in Chicago, said that alternative asset vehicles, such as interval funds, “often promise more liquidity than their underlying assets can actually support, a mismatch that becomes dangerous in a market downturn.”

(Reporting by Suzanne McGee in Providence, Rhode Island; Editing by Megan Davies and Jamie Freed)