Money Stuff: Private Assets Are Coming to 401(k)s

Yay? Look, the timing isn’t great. Even a few months ago, the big story in financial markets was the rise of private credit, and the push to put alternative assets like private equity and private credit into ordinary people’s retirement funds. But now the big story is that ordinary people are trying to get their money out of private credit funds, and not being able to, and being upset. It is not the most auspicious possible moment to ask people to put more private credit in their 401(k)s. But financial-market memories are short, and regulatory timelines are long, and maybe by the time 401(k) plans are actually offering a lot of private credit everyone will want it again. Also private equity, at least in some forms, is still hot. A lot of people would love to put SpaceX in their 401(k)s.

Anyway Bloomberg’s Lydia Beyoud, Loukia Gyftopoulou and Silla Brush report:

Companies offering alternative assets in retirement savings plans would get more legal protection under a new Trump administration proposal, potentially opening up opportunities for firms like Blackstone Inc. and Apollo Global Management Inc. in the $14 trillion market.

The changes could make it easier for 401(k) plans to include private credit, private equity, crypto and real estate investments. The Labor Department plan, which is subject to public comment, aims to blunt threats of class-action litigation that has discouraged some employers from adding alternative investments.

Oh yes, also crypto. Here are the Labor Department’s announcement and rulemaking proposal, and here is a Wall Street Journal op-ed by Lori Chavez-DeRemer, the Secretary of Labor.

The basic situation with 401(k) plans in the US is:

• A lot of companies offer their employees 401(k) retirement savings plans. The employees can choose how to invest the money, from a menu of investment options offered to them by the company.
• Under ERISA, the Employee Retirement Income Security Act, the company has a fiduciary duty to the employees to offer them good investment options (and not offer bad ones). It has to be a prudent and loyal fiduciary, choosing investment options thoughtfully with the employees’ best interests at heart.
• If the company violates its fiduciary duty and offers bad investment options, it might get in trouble with the Department of Labor.
• If a company violates its fiduciary duty and offers bad investment options, it might also get sued. Some enterprising plaintiffs’ lawyer will find some employee of the company who is unhappy with the investment options and will bring a lawsuit, arguing that because the company offered Investment X instead of Investment Y, its employees missed out on $Z of gains. For a big company with a big plan, $Z will be big, and will be pretty easily measurable in hindsight. (“Investment X went up 8% per year but Investment Y went up 8.2% per year, times 10 years times 10,000 employees equals a lot of money,” etc.) 

The main way to defend against those lawsuits is to offer only defensible investment options, options that a prudent and loyal fiduciary would put in a retirement plan. I wrote last year that “there are shifting norms about what sorts of investments are prudent and thus can be offered in 401(k)s,” and that in particular there are now norms that investment options with high fees are bad. A lot of 401(k) lawsuits are about fees, but we have also discussed recent lawsuits arguing that doing environmental, social and governance (“ESG”) investing in a 401(k) plan is a breach of fiduciary duty, or that not doing ESG is a breach of fiduciary duty.

And then there are alternative investments like private equity and private credit. Those investments tend to have high fees and also other arguable problems (low liquidity, limited disclosure), so they are tricky to put into 401(k)s. But asset managers really want to put them into 401(k)s, for a combination of good reasons (you don’t need much liquidity in your retirement funds; private assets sometimes have higher returns) and bad reasons (high fees; top-ticking).

When we talked about this last year, I went on:

The essential question is not whether you should be allowed to invest in those things, but rather whether you should be able to sue your company for letting you invest in those things, if they lose money. … Are those prudent options for your employer to put on the 401(k) menu?

I mean the obvious answer is “last year they were not prudent, but the norms changed and now they are.” That’s not, like, a financial answer. It’s not that private equity and crypto were volatile and charged high fees in 2024, but now there have been structural changes such that they are safe and cheap. It’s that in 2024 the US federal government was pretty skeptical of crypto and of high-fee opaque investments in 401(k)s, and in 2025 a different federal government loves that stuff. 

There is a subtle flaw in that logic, though. The flaw is that “norms” and “what the federal government loves” are not exactly the same thing. To the extent 401(k) plans are regulated by the Department of Labor, the Department of Labor can change how they are regulated. Chavez-DeRemer’s op-ed says:

The Biden administration stifled plan innovation by warning in 2022 that it would audit any plan sponsor that offered alternative investments in retirement plans. That bureaucratic threat stopped plan modernization in its tracks, leading to a retirement system dependent on the stock values of a declining number of large public companies. With this proposed rule, the Trump administration is restoring the neutrality toward various investment types that predominated for almost 50 years of retirement law and regulation before the Biden administration’s radical departure.

Fine. But to the extent that 401(k) plans are regulated by plaintiffs’ lawyers who will sue companies for offering investments they don’t like, I am not sure that the Department of Labor controls that. More specifically, there is a guy named Jerry Schlichter who put himself in charge of this; as we discussed last month, he kind of invented the business of suing companies for their 401(k) offerings. I bet he’s thrilled about the new rules, because they will give him more targets to sue. If he sues a compay and it goes to court and says “look, we offered a 401(k) plan that is entirely crypto because the Trump administration loves that stuff,” (1) Jerry Schlichter won’t be persuaded and (2) the court might not be persuaded. “The Trump administration doesn’t get to decide what a prudent investment option is,” a judge might say. 

Oh, it wants to. The proposal says:

The overarching goal of the proposed regulation is to 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 dignified and comfortable retirement. This goal can be achieved only by clarifying that ERISA gives fiduciaries (not opportunistic trial lawyers) the discretion and flexibility to determine when designated investment alternatives, including those that contain alternative investments, offer the opportunity for participants to maximize risk-adjusted returns on their retirement assets net of fees.

The way this works is that the new rule has a “safe harbor” saying that, if a company follows the right procedures in evaluating investment options, it is presumed to have acted prudently. “When a plan fiduciary objectively, thoroughly, and analytically considers, and makes a determination following the described process with respect to, any of the six factors outlined in the paragraphs” —  performance, fees, liquidity, valuation, benchmarking, and complexity — “its judgment regarding the factor or factors is presumed to be reasonable and is entitled to significant deference.” 

But lawyers could sue anyway? In the olden days, if a regulatory agency like the Department of Labor said that some judgment under ERISA was presumed to be reasonable, courts would agree: The Labor Department is in charge of ERISA regulation, so its interpretation was pretty binding. This was called “Chevron deference.” The US Supreme Court got rid of it in 2024. Now courts can make their own decisions about ERISA fiduciary duties, and it is not obvious to me how much they will care about the Labor Department’s views. We talked last year about a court decision finding that ESG is a violation of fiduciary duties; in that opinion, the judge does not seem to have cited any Labor Department rules, and he said that “an ERISA fiduciary’s duty is derived from the common law of trusts,” not from Labor Department regulations.

And in fact the Labor Department release spends some time explaining that, while its safe harbor is not exactly binding on private lawsuits, courts will probably accept it:

The Department has clear statutory authority under ERISA section 505 to promulgate safe harbors, including safe harbors regarding the fiduciary duty of prudence. ...

The Departmental explication of a prudent process is entitled to Skidmore deference … as persuasive authority regarding what constitutes a prudent process. ... Accordingly, this regulation should carry persuasive weight to courts under Skidmore such that fiduciaries that comply with the regulation should be found to have followed a prudent process with the result that their judgment with regard to the particular factor at issue (including the relationship of that factor to the other factors) is respected.

Maybe that’s right. But there are two general points here. [1] First, you need regulators to deregulate. New rules — even deregulatory rules — only have “persuasive authority” to the extent that they are persuasive. The substance of this rule is not “lol go ahead and put private credit in 401(k)s, there are no rules now.” The substance is that you have to go through a thorough and documented process to prove that you made a good decision in putting private credit in your 401(k) plan.

Second, in the US, the rules for financial markets are not just set by regulators or by presidential decree. The rules that actually bind markets are often in fact set by entrepreneurial plaintiffs’ lawyers and by what they can argue persuasively in court. “Everything is securities fraud,” I often say around here, not so much about US Securities and Exchange Commission enforcement but rather about entrepreneurial plaintiffs’ lawyers; the rules about securities fraud are out of the hands of the SEC. Similarly, here, the Trump administration might want to stop “opportunistic trial lawyers” from telling companies how to run their 401(k) plans, but I’m not sure the trial lawyers will listen.

The way modern “liability management exercises” work is that a company will try to get holders of 51% of its debt to agree to stiff the other 49%. Holders of the majority of the debt can probably vote to do something bad for the existing debt — to strip out collateral or covenants or something — and the company will get them to do that by giving them something good — some more senior debt — as an incentive. If you’re in the favored group and vote with the company, you get a bonus; if you’re in the disfavored group and vote against it, you get stiffed.

There is a certain amount of fairly obvious game theory here: It is much better to be in the 51% than the 49%, which gives the company some leverage. “If you join our deal we will stiff you a little, but if you don’t then we will stiff you a whole lot” is basically a persuasive argument. The company might not have to offer that much to get a majority of its creditors to agree to a debt restructuring that is absolutely terrible for the minority.

One way to thwart this is for the creditors all to get together and promise not to do it: They can sign an agreement promising not to cut any side deals with the company. As we have discussed a few times recently, this is controversial, and at least one company has argued that these cooperation agreements violate antitrust laws. (Here is an amicus curiae brief filed last week arguing that that’s nonsense.)

But the company can play that game too: It can ask creditors to sign an agreement promising not to talk to other creditors. And then the usual game theory applies: If you don’t sign the agreement promising not to talk to other creditors, the company won’t let you into the good deal, so you’ll be stuck in the outside 49%, getting stiffed. And you don’t know if other creditors have signed the agreement, because if they have they won’t talk to you. Very unpleasant! Bloomberg’s Reshmi Basu and Luca Casiraghi report:

When Vibrantz Technologies — a paint-additives maker owned by a private equity firm — overhauled its borrowings earlier this year, its smaller creditors were offered a choice: Agree not to speak to your fellow lenders and challenge the transaction before it closes, or face the prospect of steeper losses. Some had little time to decide.

Several individual lenders took the deal with the American Securities-backed company, according to people familiar with the matter who asked not to be identified discussing confidential information.

To even glimpse the debt restructuring terms, these creditors first had to sign these separate pacts. Vibrantz’s strategy — which also involved cutting different deals with other creditor groups — effectively precluded the collective negotiating that's been used as a defense ahead of recent major restructurings.

“When a company starts down the path of liability management, it is often determined that lenders will not be treated the same,” said Steven Purdy, co-head of global credit at TCW Group, who spoke generally about the market. “Once you’ve crossed that Rubicon, everything becomes a negotiation.”

If you know that lenders won’t be treated the same, you’d rather get the best bad treatment than the worst.

I write sometimes about how big investment banks operate in a gift economy. If the chief executive officer of a big company calls up her coverage banker and asks him to model up a potential acquisition, or update her on the debt markets, or recommend some candidates for her board of directors, or get her Knicks tickets, or give her shiftless nephew a job, he will leap at the opportunity to do it and never think of sending her a bill for his time and expenses. And then the expectation is that, when she decides to do a merger or a debt offering, she will hire him to lead it, though she has like 20 coverage bankers with that expectation and Knicks tickets so sometimes they are disappointed.

Banks’ wealth management departments also kind of work like that: You pay your private banker X% of your assets per year, so you might as well get your money’s worth. If your assets are big enough, your banker will absolutely get you Knicks tickets, and that is just the starting point. If you are rich and need to sit down and talk to someone about your shiftless son-in-law, a therapist will bill you hundreds of dollars per hour, but your private banker has all day for you and will never send you a bill. Or, rather, the bill is X% a year, but that covers everything. And so in fact private wealth managers compete to offer concierge services to their wealthy clients to win the business — the asset management — that they really want.

The Financial Times reports:

Wealth managers are increasingly helping their clients evacuate the Middle East since the beginning of the Iran conflict as part of a widening suite of services to rich investors.

As the wealth industry consolidates and faces competition from financial technology firms, family offices and asset managers are turning to specialist concierge functions to maintain their edge and justify high fees.

“We get our clients preferred access to a number of different security partners,” said [Susie] Cranston [of Cresset], “and we also have specialised firms that assist in very unique one-off situations, including an ex-CIA operator.”

Right yes if you send a CIA operator to rescue a client from a war zone, she’s probably not going to shift her money to your competitor just because they offer lower fees or better Knicks tickets.

Classically there are three main ways to make money in investing:

1. You can accept some risk that other people don’t want to bear, and get paid for it.
2. You can take advantage of other people’s psychological failings, buying stuff that they don’t buy because they are irrational or mistaken.
3. You can take advantage of other people’s structural failings, buying stuff that they don’t buy because they’re not allowed to.

Many trades can be explained in all three ways. Famously, stocks that are heavily shorted underperform the market. You could tell a risk story about that (if you short heavily shorted stocks, sometimes you get absolutely smoked), or a psychological story (people find short selling icky and prefer to make more positive trades), or a structural story (lots of big institutional investors have mandates that don’t allow shorting; the cost of borrowing stock to sell short eats up most of the profits).

Cliff Asness was on the Money Stuff podcast last year, and we talked about the momentum effect — where stocks that go up continue to go up, and stocks that go down continue to go down — as reflecting risk and/or psychology. (“The jury is still out on whether momentum is a behavioral or risk-based factor,” Asness has written.) But here is a paper on “The Intramonth Momentum Cycle,” by Daniel Nathan, Matti Suominen and Joni Tasa, arguing that it’s mostly structural:

US equity momentum returns accrue almost entirely in just six trading days each month. We show this concentration arises from investors’ dash-for-cash: the need to raise cash before month-end payment deadlines leads to selling pressure on loser stocks a few days before month-end. … Our evidence points to a simple mechanical driver for the momentum premium: systematic month-end liquidity needs financed by selling loser stocks. These findings suggest that momentum is less about slow information diffusion and more about the fundamental plumbing of the equity market.

They have a clever causal experiment: In 2024, US stock settlement shifted from T+2 to T+1, so that if you sold stock on a Monday you’d get the cash on a Tuesday instead of, as previously, on a Wednesday. If you are selling stock to raise cash for month-end redemptions, the shift to T+1 allowed you to wait one extra day to sell, and investors did:

We achieve causal identification by exploiting the SEC’s May 2024 transition to T+1 settlement. This reform eliminated the settlement-mismatch friction and, as predicted, shifted the pre-month-end selling pressure one day later. 

My approximate model of Bill Gross’s departure from Pimco is that there was a crew of ambitious Pimco executives who ranked just below him, he tried to make them sit in bad seats at meetings, and they reacted by launching a coup and kicking him out. This is probably exaggerated but, you know, emotionally true.

Meanwhile the end of Crispin Odey’s hedge fund apparently involved the executives below him trying to make him sit in a bad seat, albeit for different reasons. The Financial Times reports:

Crispin Odey objected to being asked to “sit in the dungeons” after executives suggested he should sit apart from female employees in response to sexual harassment allegations against him, the financier has told a court.

The founder of the hedge fund Odey Asset Management said he was so offended by the idea that he should move to a lower ground floor office segregated from female colleagues that he fired the executives who had proposed it.

“That’s why I got rid of them,” Odey said on his final day of evidence to London’s Upper Tribunal in the case he has brought to challenge the £1.8mn fine and lifetime ban from financial services imposed by the UK regulator over his response to sexual misconduct allegations.

Arguably a lifetime ban on sitting near women is a more appropriate response to sexual misconduct allegations than a lifetime ban on providing financial services.

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