By Elizabeth O'Brien
Alternative assets are on their way to your 401(k). Think twice before you let them in.
In late March, the U.S. Department of Labor released a proposed rule for including alternative assets like private credit in workplace retirement plans. The goal, the Trump administration said, is to democratize access to investments that had previously been the purview of institutional investors and wealthy individuals. The administration is collecting public comment on the proposal, and a final rule is expected later this year.
Alternatives offer diversification and the potential for higher returns than publicly traded stocks and bonds, proponents say. But recent stresses in the private-credit market raise the question of which risks are acceptable for retirement savers -- both inside and outside their 401(k)s.
"This is coming at an interesting time in the market, with the beating that some of these strategies have taken year to date," says Kimberly LaVigne, head of distribution at F/m Investments, an investment manager that isn't involved in private credit.
Alternative assets encompass investments like real estate, commodities, digital assets, private equity, and private credit, the last of which has made headlines recently for redemption requests from jittery investors worried about defaults. Private credit traditionally refers to loans made to companies that are smaller and riskier than those that go to banks for financing, although the category has expanded to include bigger and higher-quality borrowers, as well.
Private credit had been on a tear over the past couple of years, with high interest rates boosting yields into the double digits. Many financial advisors had recommended private credit for clients through firms like Apollo Global Management and Ares Management. Their so-called semiliquid funds offer periodic buybacks to investors looking to exit and have the ability to gate their fund to limit redemptions. In recent months, both have been among those that have enforced a 5% cap on their redemptions to stanch outflows.
Retail investors may help fill the the "capital gap" caused by the exodus of bigger investors, says Tomasz Piskorski, a professor of finance at Columbia Business School. This includes retirement savers, who collectively hold $14 trillion in 401(k) and equivalent plans -- a well that alternative-asset managers have been eager to tap.
Yet retail investors might not understand what they're getting into, Piskorski says. The main risks involved in private credit are limited transparency compared with publicly traded securities, limited liquidity, and less regulation. On top of that, alternative investments typically charge higher fees than traditional mutual funds or exchange-traded funds.
If alternatives delivered on their promise of higher returns, many investors would be willing to pay a premium. But that's not guaranteed. To shoehorn an illiquid investment into an account that demands daily liquidity, like a retirement fund, adjustments will have to be made. That could mean the fund holds a sizable cash cushion that provides adequate liquidity but also acts like a drag on returns.
To be sure, retirement plan sponsors have a legal responsibility to vet investments in their participants' best interest. The Trump administration outlined six factors for plan sponsors -- usually, employers that provide retirement plans to their workers -- to consider to determine whether they are fulfilling their fiduciary duty: performance, fees, liquidity, valuation, benchmarking, and the complexity of the designated investment alternative.
A plan fiduciary who considers these factors should be able to come to a determination without "undue fear of litigation," the proposal says. Still, plan sponsors are skittish, and it will probably be a few years before alternative investments arrive en masse in 401(k) plans, experts say. When they do, they will most likely take the form of a small allocation of a professionally managed product like a target-date fund.
But that raises another question: "If it's only 5% to 10% of target-date funds, how much is this really helping the average 401(k) investor?" says Paul Secunda, a plaintiff's attorney at Walcheske & Luzi who has represented retirement savers in numerous lawsuits.
Write to Elizabeth O'Brien at elizabeth.obrien@barrons.com
To subscribe to Barron's, visit http://www.barrons.com/subscribe
(END) Dow Jones Newswires
April 03, 2026 21:30 ET (01:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments