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New Retirement Bill Would Allow Alts in 401(k)s

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GOP lawmakers introduced Thursday the Retirement Savings Modernization Act to allow 401(k) plans to invest in alternative assets, such as real estate and private equity.

The bill, introduced by Sens. Pat Toomey, R-Pa., and Tim Scott., R-S.C., and Rep. Peter Meijer, R-Mich., amends the Employee Retirement Income Security Act of 1974 to clarify that private-sector retirement plan sponsors may offer plans, including both pensions and 401(k)s, that are prudently diversified across the full range of asset classes.

“With inflation at record highs, a stock market downturn, and a potential recession on the horizon, many Americans are rightfully concerned about their financial future,” Toomey said in a statement. “Our legislation will provide the millions of American savers invested in defined contribution plans with the option to enhance their retirement savings through access to the same wide range of alternative assets currently available to savers with defined benefit pension plans.”

Such a plan, Toomey said, “will open the door to higher returns and a more secure retirement for millions of Americans.”

Scott added that the bill “would modernize retirement plans to ensure they can provide diverse investments with higher returns. American workers and their families deserve to go about their lives with peace of mind, knowing their hard-earned money will be secure when they choose to retire.”

The bill is supported by the Securities Industry and Financial Markets Association (SIFMA), the Defined Contribution Alternatives Association (DCALTA), the Institute for Portfolio Alternatives (IPA), the Small Business Investor Alliance (SBIA), the American Securities Association (ASA), and the Chartered Financial Analyst (CFA) Institute.

It clarifies that plan fiduciaries may select investment options that include a range of asset classes, including private equity.

Fiduciaries must still select investments through a prudent process, the lawmakers said, “and the bill explicitly does not create a safe harbor from a fiduciary’s legal duties.”

Further, it “does not require that plan participants have access to specific asset classes, but it provides fiduciaries with the tools to better ensure diversification.”

Since 1982, the lawmakers said, pension plans have incorporated exposure to asset classes outside of the public markets, such as private equity and real estate. While 401(k) plans are covered by the same law, “almost never incorporate exposure to alternative assets due to fiduciaries’ anticipated litigation risk,” the lawmakers said.

Pension plans, the lawmakers said, “have consistently outperformed 401(k) plans because they diversify across the full range of asset classes, putting one of every five dollars in alternative asset classes like private equity.”

They cited a recent Georgetown study estimating that 401(k) plans diversified with a modest allocation to alternative asset classes — private equity, hedge funds, and real estate — would increase American workers’ retirement savings by 17% per year and reduce losses in a downturn.

Secure Act 2.0

The Retirement Savings and Modernization Act may become part of the Secure Act 2.0 bill, which industry watchers expect to be taken up on the Senate floor during the upcoming lame-duck session of Congress.

Senate Finance Committee Chairman Ron Wyden, D-Ore., and Sen. Mike Crapo, R-Idaho, introduced on Sept. 8 the final text of the bipartisan Enhancing American Retirement Now (EARN) Act, which passed the committee in June.

The EARN Act and the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg, or Rise & Shine, Act, which passed the Senate Health, Education, Labor & Pensions Committee by voice vote on June 14, will become the baseline text for the Senate to negotiate a final Secure 2.0 bill with the House between now and the end of the year.


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