Implementing the Executive Order on Democratizing Access to Alternative Assets for 401(k) Investors

President Trump recently issued an executive order (EO) directing the U.S. Secretary of Labor to review fiduciary guidance on private market investments in 401(k) and other defined contribution plans governed by ERISA. The EO also instructs the SEC to explore ways to expand access to alternative assets for participants in those plans. This is a significant step forward, and ICI looks forward to working with the White House, Congress, the SEC, and the DOL to carry out these directives. The following reforms, which utilize funds regulated under the Investment Company Act of 1940 (’40 Act) and the many investor protections that come with the ’40 Act, are a perfect place to start. (Learn more about these protections here).

DOL Reforms for ’40 Act Funds on Retirement Platforms

Many retirement plan sponsors are interested in offering target-date funds and other diversified products that include a sleeve of assets in ’40 Act funds holding private assets. These sponsors are fiduciaries under ERISA, and including such diversified funds can be consistent with their duties when selection and monitoring processes are followed. ICI was pleased to see the DOL rescind guidance that discouraged fiduciaries from considering alternative assets in 401(k) investment lineups in response to the EO. We also support DOL guidance clarifying that target-date funds with allocations to ’40 Act funds investing in private assets are permissible in 401(k) plans.

SEC Reforms to Encourage Capital Formation and Investor Choice

The quickest and most direct way to fulfill the EO’s call for greater access to alternative asset investments is to promote capital formation in exchange-listed products that offer retail investors diversified exposure to these assets and are purchasable through self-directed brokerage accounts (also known as brokerage windows) available in many 401(k) plans. Listed closed-end funds, in particular, can provide efficient, transparent access to private markets and are available through these brokerage windows.

A major barrier, however, is the chilling effect of predatory activist campaigns, which have all but frozen the IPO market for listed closed-end funds. These activists exploit mandatory annual meeting requirements to undermine funds and their shareholders. Exchange listing proposals currently pending before the SEC could address this today by making annual meetings optional for listed closed-end funds, and thereby align their  governance rules with those for open-end funds. Such a change would significantly reduce activist disruption, reopen the CEF IPO market, and advance the President’s directive.

Beyond this, the SEC can take additional steps to encourage the launch of ’40 Act funds that provide access to alternative assets. Since target-date funds in 401(k) plans are likely to achieve much of their exposure to alternatives through investment in such ’40 Act funds, fostering capital formation is essential to give plan sponsors more choice.

The SEC’s recent removal of the informal 15% limit on private fund investments by public closed-end funds was an important step, but further reforms are warranted. ICI recommends:

• Further expanding exemptive relief to allow more flexible co-investment between ’40 Act funds and affiliated private funds, while maintaining safeguards against conflicts of interest.
• Revising the fund-of-funds rule and/or issuing interpretive guidance to permit ’40 Act target date funds to allocate to ’40 Act funds holding securities of private funds or structured investments, such as structured private credit.

These changes would make it easier for sponsors to launch ’40 Act funds that offer retail investors well-regulated access to alternative asset strategies, which in turn would increase allocation options and choices for target date funds.

Expanding Access Without Sacrificing Protections

Any discussion of expanding access to private markets should begin with the principles and safeguards of the ’40 Act. This framework already serves 127 million U.S. shareholders and oversees nearly $40 trillion in assets. Decades of SEC oversight and built-in investor protections make ’40 Act funds a responsible way to open private market opportunities to individual investors without compromising transparency or safeguards.