Alternatives Within Your 401(k)

For decades, the investment landscape of 401(k) plans has looked remarkably similar: public stocks, bonds, mutual funds, and—more recently—ETFs. These were the building blocks for millions of Americans’ retirements.

That began to change in 2020, when the Department of Labor (under the Trump administration) issued an Information Letter clarifying that private equity could be used in limited ways inside diversified, professionally managed 401(k) funds. It was a subtle but meaningful opening.

Now, in August 2025, President Trump has gone much further. Through his Executive Order on Democratizing Access to Alternative Assets for 401(k) Investors, the administration has directed regulators to actively expand and encourage the inclusion of alternative assets in retirement plans. This means 401(k) investors may soon see exposure not just to private equity, but potentially to real estate, private credit, infrastructure, and even digital assets, all wrapped into their retirement savings vehicles.

At first glance, this is exciting. For years, alternatives—private equity, hedge funds, venture capital, and real assets—were the exclusive playground of large pensions, endowments, and ultra-wealthy families. Suddenly, the potential to access these once out-of-reach opportunities is closer to the average retirement saver than ever before.

But excitement must be tempered with caution. Just because alternatives are newly accessible does not mean they are automatically appropriate for everyone—or even most 401(k) investors.

The Promise of Alternatives

The allure of alternatives is real. These investments have historically generated returns that often-outpaced public equities, albeit with very different risk and liquidity profiles. They offer:

• Diversification: Alternatives may zig when public markets zag, potentially reducing portfolio volatility.
• Enhanced return potential: In the right structures, private equity has historically delivered higher long-term returns than many traditional investments.
• Access to unique opportunities: From real estate developments to private companies poised for growth, alternatives open doors to markets that were previously inaccessible inside a 401(k).

These are compelling features, especially in an era when traditional bonds offer modest yields and equities feel richly valued.

The Risks Beneath the Surface

However, alternatives are not a free lunch. They come with a very specific set of challenges, which are especially pronounced inside a daily-valued, participant-directed retirement plan like a 401(k). Key risks include:

• Liquidity constraints: Many alternative funds lock up capital for years. That illiquidity clashes with the expectation that retirement plan assets can be valued—and redeemed—daily.
• Higher fees: Alternatives are expensive. Layering them into target-date funds can increase costs significantly, and higher costs eat away at long-term returns.
  Valuation opacity: Unlike stocks that trade on public markets, alternatives often rely on periodic, subjective valuations that may not reflect true, real-time value.
• Complexity: These are not simple index funds. Understanding how a private equity sleeve affects a target-date fund requires far more sophistication than most plan participants—and many fiduciaries—possess.

Even with the Executive Order, fiduciary duty under ERISA remains unchanged. Plan sponsors and advisors must still evaluate prudence, costs, liquidity, and transparency with rigor.

How Policy Has Evolved

To better understand how we got here, it’s important to compare the two pivotal policy shifts—first the 2020 Department of Labor guidance, and now the 2025 Executive Order.

Key Differences: 2020 vs. 2025 Policy Shifts on Alternatives in 401(k)s

This evolution highlights the growing emphasis on alternatives in retirement plans but also underscores why fiduciary responsibility and personalized advice remain critical.

What This Means for Investors

For participants, this change does not mean you can suddenly log into your 401(k) portal and allocate half your retirement account to a private equity fund. Alternatives will likely appear indirectly, as part of diversified, professionally managed products such as target-date funds.

And even if they do appear, the presence of alternatives doesn’t guarantee better outcomes.

This is where guidance matters most.

An experienced financial advisor can help weigh whether exposure to alternatives fits your personal situation. Are you close to retirement and in need of liquidity? Are you willing to take on higher fees for the chance at incremental returns? Do you understand the potential volatility, opacity, and timeline mismatches involved?

These are not decisions to make on instinct or excitement, they require a sober, tailored analysis of your unique financial position.

A Step Forward—But Not Without a Guide

The inclusion of alternatives in 401(k) structures—first hinted at in 2020 and now supercharged by the 2025 Executive Order—is an important step forward. It acknowledges that diversification should not be reserved solely for the ultra-wealthy or large institutions. For long-term investors, the potential benefits are undeniable.

But enthusiasm must be matched with discipline. Alternatives are powerful tools, not magic wands. They demand careful consideration, a clear understanding of the risks, and—above all—the presence of a trusted advisor who can place them in the proper context of your retirement plan.

Because while access is exciting, wisdom is priceless.

Sources:

U.S. Department of Labor. (2020, June 3). Information letter 06-03-2020: Use of private equity investments in designated investment alternatives. Employee Benefits Security Administration. 

U.S. Department of Labor. (2021, December 21). Supplemental statement on information letter 06-03-2020. Employee Benefits Security Administration. 

The White House. (2025, August 7). Executive order on democratizing access to alternative assets for 401(k) investors. 

U.S. Department of Labor. (2025, August 12). U.S. Department of Labor rescinds 2021 supplemental statement on private equity in retirement plans. News Release.