Expanded Options for Your 401(k): Crucial Information You Should Understand

Expanded Options for Your 401(k): Crucial Information You Should Understand

In a move that could reshape retirement planning, President Donald Trump signed an executive order potentially expanding investment options for 401(k) plans to include private equity, real estate, expanded annuities, and cryptocurrency. However, this new landscape comes with its own set of challenges.

Private equity and real estate can offer access to private deals and growth opportunities not found in typical mutual funds. Yet, they are often illiquid, meaning your money might be locked up for years. The fees associated with these investments can be layered and harder to spot, which can quietly shrink your returns.

Annuities are marketed as a way to guarantee income in retirement, providing a kind of safety net for those who want steady, predictable cash flow. However, annuities come with their own hurdles, such as contracts that can lock you in for a decade or more, and terms that are often so dense that even seasoned investors struggle to compare one product to another.

The push to add these complicated investments to 401(k)s is coming from companies that stand to profit, such as insurance firms, recordkeepers, and investment managers. While these entities can charge higher fees and lock in long-term contracts with plan sponsors, it's worth noting that 401(k) plan sponsors are supposed to act in participants' best interests as fiduciaries.

However, employers may lack the expertise to evaluate complex investments added to 401(k) plans. Plan providers can explain how a new investment option works, but they are not looking at your full financial picture. If unsure, consider getting a second opinion from a fee-only fiduciary adviser.

It's important to remember that you are the one who must decide whether to use new investment options added to your 401(k). With a traditional 401(k), you might qualify for an in-service withdrawal after 59 1/2, which lets you roll funds into an IRA. An IRA typically offers a broader range of investments, including private equity and annuities, on your terms, not your employer's.

The executive order does not require employers to offer these new investment options, but if they do, individuals will need to navigate a potentially riskier set of choices. More investment options can lead to more homework and more ways to get tripped up in retirement planning. It's worth thinking about how you'll evaluate any new choices that appear in your 401(k).

The expansion of investment options in 401(k)s might open up new opportunities, but it also introduces more complexity and potential risks. Whether this is good for your retirement depends entirely on how, and if, you choose to use it.

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