Earlier this month, the White House announced that US President Donald Trump had signed an executive order “to allow 401(k) investors to access alternative assets for better returns and diversification”. Aside from perhaps property tycoons and tech barons, few have reason to applaud this move, which allows retirement fund investors to access risky financial assets such as cryptocurrencies and real estate.
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Setting aside for a moment the fact that Trump or members of his family have vested interests in some of these asset classes, Trump’s apparent contempt for prudential regulation threatens to put trillions of dollars of pension fund assets at risk just at a time when they are badly needed for more responsible forms of investment.
Already, pension funds are invested in arguably overvalued tech stocks, which dominate US and other stock markets. Such investments have the power to topple markets. Adding further risk to this shaky structure at a time when underfunded areas such as the fight against global warming, inadequate infrastructure and health services are crying out for investment seems irresponsible, to say the least.
In the US, 401(k) plans are portable schemes where contributions, instead of benefits, are defined in advance. In theory, investors have the right to assume their savings are being deployed wisely and safely.
A 401(k) is a deferred arrangement. Employees can elect to defer receiving a portion of their salary, which is instead contributed on their behalf, before taxes, to their 401(k) plan. Sometimes employers match these contributions.
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Similar to Trump’s pressure on US Federal Reserve chairman Jerome Powell to lower interest rates, the executive order “instructs” the US Secretary of Labour to “clarify” her department’s position on alternative assets.