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Senate bill would boost alternative assets in 401(k) plans

Sept. 29, 2022 Updated Thu., Sept. 29, 2022 at 8:48 p.m.

Sen. Pat Toomey, R-Pa., is leading Senate introduction of the draft bill to expand retirement plan investments.  (Tribune News Service)
Sen. Pat Toomey, R-Pa., is leading Senate introduction of the draft bill to expand retirement plan investments. (Tribune News Service)
By Laura Weiss CQ-Roll Call

WASHINGTON – A new bill from top Republicans on the Senate Banking Committee aims to open workplace retirement plans to a bigger range of investments, making it easier for 401(k) plans to diversify with holdings in private equity, hedge funds, real estate, cryptocurrencies and other alternative assets.

The panel’s top GOP member, Sen. Patrick J. Toomey of Pennsylvania, is leading Senate introduction of the draft bill, which comes as lawmakers work to move broad retirement savings legislation by the end of the year.

Toomey’s bill with Sen. Tim Scott, R-S.C., and House sponsor Rep. Peter Meijer, R-Mich., would clarify that a range of nontraditional investment options is among those that workplace plan managers can recommend, select or monitor without breaching their fiduciary obligations. The legislation would also clarify that expenses related to these investments, which in many cases charge higher fees than traditional mutual funds found in typical 401(k) plans, would be acceptable.

The bill lists certain investments intended to be workplace plan options, though the text says that list is not exhaustive. Private equity and hedge funds as well as venture capital firms that invest in startups are named, as are real estate assets and “related securities” such as real estate investment trusts, which pool together a range of income-producing properties. Commodities are named, as well as infrastructure investments, insurance products and annuities and “digital assets,” including cryptocurrencies.

While current law doesn’t explicitly prevent these types of investments, the risk of lawsuits has largely dissuaded 401(k) plan managers from mixing them in, according to a Toomey aide. Traditional defined-benefit pension plans, meanwhile, have mixed in some of these assets and face less risk doing so because they pay out fixed benefits in retirement.

The aide added that with companies waiting longer to become publicly traded, the measure aims to make sure average investors have access to private markets and can diversify their holdings.

Toomey said in a statement that the bill would allow Americans with 401(k)s and similar plans to enhance retirement savings by accessing the same investment options as people with defined benefit pension plans.

“This reform will open the door to higher returns and a more secure retirement for millions of Americans,” he said.

The bill would also settle policy that’s come up for recent debate.

During the Trump administration, the Labor Department opined that private equity could be part of a workplace retirement plan including for default options that would be assigned to new employees automatically enrolled in a 401(k) plan. Under the Biden administration, the Labor Department didn’t reverse the Trump-era opinion, though it offered a clarification that such investments might be risky for smaller workplace plans without as much expertise.

The Labor Department earlier this year did warn 401(k) plan managers to “exercise extreme care” before adding cryptocurrency options to their investment plans.

Still, some plan providers have announced their intent to offer cryptocurrencies in their workplace accounts, including Fidelity Investments’ move to allow Bitcoin as a 401(k) offering. Top Democrats like Sen. Elizabeth Warren and House Ways and Means Chairman Richard E. Neal, both from Fidelity’s home state of Massachusetts, have raised questions about such moves.

Toomey is aiming to include his retirement legislation in a potential year-end tax package, according to an aide to the senator. If lawmakers are able to negotiate a package in the lame-duck session after the midterm elections, it would likely also carry a broader, bipartisan package meant to boost retirement savings that would be based on similar House and Senate bills.

Those measures and a previous bipartisan retirement savings law include provisions to open retirement accounts to more investment types, specifically aiming to make it easier to hold annuities, which are insurance contracts that pay out regularly in retirement.

Proponents are also hoping to add a Democrat as a co-sponsor of the legislation, according to Toomey’s aide. Bipartisan support would boost its chances for a year-end tax bill, which will need support on both sides of the aisle to pass.

Toomey retires at the end of the year, and the lead House sponsor, Meijer, lost a primary challenge and won’t be returning next Congress.

Scott could keep up the push for the legislation if it doesn’t get done this year. He’s in line to take over as the Banking panel’s top Republican when Toomey retires.

The measure has industry backing, including an endorsement from the Securities Industry and Financial Markets Association, which represents investment banks, asset managers and broker-dealers including JPMorgan Chase & Co., BlackRock Inc., Vanguard Group Inc. and Bank of America Corp.

Two groups that advocate for retirement plan alternatives – the Defined Contribution Alternatives Association and Institute for Portfolio Alternatives – backed Toomey’s bill in a letter this spring.

The Defined Contribution Alternatives Association represents investors in private equity, venture capital, commodities and other nontraditional alternatives, with board members like Chicago-based Northern Trust Corp., which managers over $1 trillion in assets.

The Institute for Portfolio Alternatives advocates for expanding investments in asset classes like real estate, business development companies which lend to smaller firms, and closed-end funds which have looser rules than mutual funds and can employ more leverage to juice returns. Board members include private equity titans like Blackstone Inc., Ares Management Corp. and KKR & Co. Inc.

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