On Aug. 7, 2025, President Donald Trump issued an executive order, “Democratizing Access to Alternative Assets for 401(k) Investors,” mandating that the U.S. Department of Labor clarify its position on fiduciaries incorporating alternative investments in 401(k) plans. Additionally the executive order calls for the DoL to issue guidance on the criteria that plan sponsors should incorporate for including and monitoring alternative investments in 401(k) plans. The executive order identifies a broad range of alternatives, including private investments in equity, debt, real estate, commodity- and infrastructure-oriented investments, as well as actively managed digital assets strategies.
This marks an inflection point in the recent trend of greater wealth management adoption of alternatives and, particularly, private capital. For the past several years, individual investors have increasingly gained access to a range of alternatives that have historically been the purview of institutional investors. While that “democratization” has been widely celebrated, there has been a reluctance by the industry to fully address the risks and ramifications that allocating to alternatives presents to investors (and advisors) who are inexperienced with private markets. Now, with the potential addition of alts to millions of 401(k) plans, it’s high time to clearly outline both the benefits and risks for investors and the broader industry.
Not All Alternatives Are Suitable for Evergreen Structures
Advisors and clients alike should be aware that cash-flowing strategies, such as private credit and real estate, may be more suitable for large evergreen structures than longer-duration investments, such as venture capital.
Private equity secondaries within a 401(k) plan could be problematic, as a meaningful portion of returns is driven by purchase discounts. In other words, investors in evergreen secondaries structures may experience a wide variation in realized returns, given the exposure to newly executed deals acquired at a discount. Typically, newly acquired funds in the secondary market are marked at the latest quarterly NAV provided by the underlying fund. Therefore, gains from discounts are front-loaded. Secondaries funds with little to no new deal activity miss out on the gains from acquiring assets at a discount, thus lowering overall returns.
Valuation efficacy is also critical to any evergreen fund structure. Some funds charge incentive fees on unrealized gains, which can lead to sub-optimal incentives, especially for incoming investors. Once again, both advisors and clients should be clear-eyed as to this possibility.
Lastly, 401(k) plan sponsors should fully understand liquidity availability and the cost of liquidity, especially given required minimum distribution mandates.
The Importance of Taking a ‘Graduating’ Approach to Alternatives
What is considered an “alternative” investment should change over time, similar to what is considered a small- or mid-cap stock. Asset classes evolve, which is to be expected and is normal. For example, areas of the private credit market continue to blur lines with the broadly syndicated loan market. There are also industry initiatives to create active secondary trading of private credit. If that convergence continues, investors and their advisors are right to question whether certain strategies are “alternative” anymore. These strategies may continue to offer attractive risk-adjusted returns, but investors should continuously re-calibrate expectations on differentiation and the cost of that differentiation.
Targeting areas of the markets with lower capacity and higher barriers to entry can result in more favorable outcomes given lower market efficiency and manager specialization.
An Influx of New Capital Could Be a Drag on Returns
With all of the new capital flowing into alternatives in recent years (with much, much more expected in response to the recent executive order), that “excess” capital supply could increase asset pricing and lower expected returns. It is not clear yet whether many evergreen fund structures, especially those that could reside in target-date funds within 401(k)s, have the mechanisms or incentives to stop accepting and deploying capital when market conditions are unfavorable.
Alternatively (pun intended), discrepancies in the supply of capital could potentially create relative pricing opportunities. As Berkshire Hathaway Vice Chairman Charlie Munger stated, “Prices are often more inefficient where crowds are small.” We believe this to be generally true with many alternative strategies. Investors, in many instances, can access lower capacity areas in the market compared to large institutions that need to make larger allocations.
If large evergreen fund structures proliferate and need to constantly invest in sizeable transactions based on fund flows (i.e., programmatic 401(k) contributions), strategies that find smaller assets at cheaper prices and assemble them into bigger portfolios may benefit from selling to funds that are required or incentivized to deploy when cash is received.
As Alternative Funds Grow, Fees Should Decrease … They’re Not
The executive order states that fiduciaries should consider how alternatives “enhance the net risk-adjusted returns on their retirement assets.” In other words, it emphasizes that net returns after fees are paramount. Higher fees are a direct headwind to potentially outperforming public assets, which have very low expenses in passive vehicles. Advisors and their clients are likely to be keenly aware of that over time. There is a wide range of expenses within private funds based on terms. However, it is common for funds to have annual all-in expenses of 300 to 600 basis points per year.
Because of that, we believe there will be a trend of fee compression as asset managers seek market share. At the end of the first quarter of 2025, there was an estimated $8.7 trillion in 401(k) plans in the United States, and a total of $12.2 trillion in defined contribution plans. Fiduciaries that can determine the appropriate blend of fund costs and manager quality will likely have a better chance of enhancing net returns for beneficiaries.
In addition, fund managers should enhance transparency to allow allocators to determine the attractiveness of stated valuations. Risk metrics also need to be suitable for the underlying strategy. Standard deviation or volatility of net fund returns are generally not suitable metrics, as private or semi-liquid funds are valued using appraisals that tend to dampen volatility.
To be clear, I’m in no way advocating that only the wealthy and institutions have access to alternatives. I’m not, nor am I saying that alternatives are right for every investor. They are not. Any investor with sufficient liquidity, and with the guidance of an experienced team of advisors, can and should have access to alternatives. But with the democratization of alts showing no signs of slowing down, we as an industry need to do better in educating advisors and investors who are relatively new to alts as to the risks and realities associated with private investing. Additionally, as markets evolve, allocators should re-evaluate what is truly differentiated or deemed “alternative.”
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