Big Changes Are Coming To Your 401k

Your 401k was designed to be on autopilot.

Target-date funds, index funds, and a few active managers. Easy, cheap, and built to shift the responsibility of investing onto you.

This been the set up for tens of millions of Americans for many many years.

That’s about to change.

On August 7th, President Trump signed an executive order opening the door for participants in 401(k) plans to invest in crypto, private equity, and real estate.

With $14 trillion sitting in workplace retirement plans, this will likely go down as one of the biggest changes to retirement investing in decades.

Most of the changes you’ve seen over your career have been technical tweaks:

• Catch-up contributions are now XYZ.

• RMDs start at 75.

• SEP Roth IRAs are a thing.

• The stretch IRA is gone.

Those changes matter, but they don’t materially shift how people build wealth inside retirement accounts. Think of those tweaks like getting a new set of tires on your car, or trading in your old F-150 for a newer model.

This is different.

The 401(k) and personal homeownership are the backbone of wealth for most Americans. And both are heavily regulated.

America’s prosperity has been built on paid-off homes and growing 401(k)s.

Log into your plan today and you’ll likely see a similar menu as you had a decade ago: target-date funds, some index funds, and maybe a few actively managed stock and bond funds.

A lot of people default to the target-date option. Others load up on the S&P 500. Some work with advisors to fine-tune things.

Regardless, choices have been limited.

Which has been both good and bad.

The future is now closer.

Back in January, I wrote about how Private Equity was coming for 401ks.

Here’s why this is happening.

Over the past twenty years, two companies, Blackrock and Vanguard, have made investing in the equity markets, fixed income, and cash management practically free for everyone.

Practically free means they've won the game and now find themselves in a strange spot. 

They need to figure out where to go from here.

I’ll give you a hint of what they are doing: Blackrock just spent $12b to buy an alternative manager.

The Future of Investing - tmrw

There is over $12 trillion in American’s retirement plans, including the 401(k), that are largely untouched by alternative asset managers.

Now, you can read this and assume that this is just some fee grab from Wall Street or how “this is the big guys screwing over the small guys.”

But the answer is more nuanced than that.

And when you see a company like Vanguard, who has fought for years and years to lower fees for every investor in the US, looking at entering the space, it’s different.

The market itself has changed.

I couldn’t think of a better example than a recent interview between Andrew Ross Sorkin of CNBC and Sam Altman of OpenAI to describe this.

Andrew pressed Sam on why they are still private and the amount of value creation that has happened outside of the public markets. Sam said this:

“… I have negative feelings about how much growth happens in private markets and how.”

Sam Altman, CEO, OpenAI

The amount of value creation that is happening outside of public markets in modern markets, is insane.

Some shares of OpenAI have traded in secondary markets at a $500 billion valuation.

If you would have told me 10 years ago there would be a company valued in the hundreds of billions of dollars that wasn’t public, I would have laughed.

For context, Amazon’s market cap was $318b ten years ago.

Company’s preference to stay private, innovation in the secondary, “private markets”, access to capital for private companies, over regulation, people’s preference – it’s hard to pin down the exact reason why the market’s have changed but here is the fact.

There is significantly more investment happening today in the private market.

And you may or may not be benefiting from that.

That is why the administration made this move: to give more people the chance to invest in alternatives.

This begs the question:

This sounds good, but is this a good thing?

Investing just got harder

That’s the truth of all of this.

In the coming years, you may log into to your 401k portal and see a new fund called something like the True North Opportunities Fund.

You’ll review it’s past performance and it’ll be dazzling.

You’ll get that feeling in your stomach, and dig deeper. You click the
“read more” link in your portal and get to the fund description, its reads:

"The True North Opportunities Fund is designed for income-focused investors seeking access to the attractive yields of private credit markets. The Fund targets monthly income, offers shareholders the opportunity for quarterly liquidity at NAV, and provides access to senior secured private loans that have historically offered higher returns with lower volatility compared to traditional fixed income. The Fund may also opportunistically invest up to 20% of its assets in equity securities of portfolio companies to enhance returns when attractive opportunities arise. Shares are available to a wide range of investors with no accreditation requirement and benefit from pass-through tax treatment and simplified reporting.”

 You’ll read the description having no clue what is actually being said, then look at the performance, and lean back in your chair and ask yourself:

“Should I do this?”

Here’s the reality.

Let’s say you’ve saved $1.2 million and want $2.2 million before you retire. You know $1.9 million would be OK, but $2.2 million would be perfect . And because you’re human, you want to get to that $2.2 million as quickly and safely as possible.

You want the best of all worlds, so do I.

That’s when the pitch for the dazzling True North Opportunities Fund in your 401k will feel almost irresistible - you potentially get high income and growth.

You’ll think to yourself “Why didn’t I buy these in 2015?”

Here is what you must know about these alternative assets that will appear in your life in the coming years - they are not like mutual funds or index funds where pretty much any fund you pick will ultimately own some Apple, some Google, some Nvidia, etc.

The point of alternatives is to not invest in “normal” assets.

Your private credit fund in your 401k could specialize in lending to specialty food manufacturers in the Southwest.

This investments will be far different than what you are used to gauging up.

Again, that’s the point.

What I think this means when I look over the horizon: the range of outcomes in investing got bigger.

*For illustration purposes only. Investing involves risk and the potential for loss. There is always the potential of losing money when you invest in securities.

I am for investments that have the potential to generate steady cash flow, that grow predictably, and that have a clear exit plan. Whether they are private or public does not matter. The discipline behind them does.

The discipline and skill of investing in alts is where people will fall short.

Which is why August 7th is not just news. It is a preview of the choices you will face more and more in the years ahead.

Your advisor will be talking to you about this.Your friends will too.You’ll see them more and more ads about them.

The question is whether you will approach this with discipline and wisdom or ignorance and greed.

Go slow, take your time, and know I will be here for you.

Thanks for your time this week,

Tom

PS. if you are ready to talk about your investing strategy, retirement, and working with our team. Let’s have a conversation.