Jessy, Golden Finance
On Thursday, Trump issued an executive order promoting the investment of 401(k) and other retirement plans in alternative assets, which include private equity, crypto assets, and more.
Currently, 401(k) plans manage $9 trillion in assets, with over 90 million people in the U.S. using this plan. Previously, this plan primarily invested in low-risk assets, such as government bonds and mutual funds.
Market estimates suggest that if 401(k) plans allocate just 2% of their assets to cryptocurrencies, it would mean an influx of approximately $170 billion—equivalent to two-thirds of the current market value of existing crypto spot ETFs and listed reserves.
Meanwhile, the Supreme People's Court of China issued a judicial interpretation on August 1, clarifying that any private agreements between employees and employers to avoid social security contributions are invalid, and starting September 1, new regulations will be strictly enforced to hold employers accountable and impose fines for evading social security contributions.
The policy directions of China and the U.S. differ, but both aim to address the pressures of their pension systems.
Golden Finance has analyzed in detail the background of the inclusion of alternative assets in 401(k) plans in the U.S. and the potential impact on the crypto industry. It also compared the different practices of China and the U.S. in the context of pension dilemmas.
The pension dilemma in the U.S.: Why does the 401(k) need alternative assets?
In the U.S. retirement security system, social security (federal pensions) serves as the foundation but generally only covers basic living expenses. Many middle-class families rely on supplementary pension plans like the 401(k) to support the quality of their retirement lives.
The 401(k) is a long-term retirement savings account established by U.S. employers for employees, enjoying tax benefits. Employees can invest a portion of their salary without paying taxes upfront, directly into this account, and withdraw it for spending upon retirement. Employers typically prepare an investment list (usually containing 20-30 funds), and employees decide how much salary to contribute (for example, 6%) and select funds from the list, allocating proportions. Salary deductions are automatic, and employers often match contributions—for instance, if an employee contributes a certain amount, the employer matches half as a benefit.
The 401(k) plan, provided by employers and voluntarily contributed to by employees while enjoying tax-deferred benefits, was once seen as an important means for individuals to autonomously accumulate retirement wealth.
However, the reality is concerning. A recent survey shows that due to factors such as inflation and rising medical costs, only about one-third of 401(k) participants still believe they can achieve their retirement goals, down from 43% last year. At the same time, state and local public pensions generally face trillions of dollars in unfunded gaps. For example, state-level pension systems have cumulatively promised to pay $6.3 trillion in pensions, but actual assets amount to only $4.9 trillion, resulting in a gap of nearly $1.4 trillion.
In this context, Trump's push to introduce alternative assets becomes clearer—amid low interest rates and inflationary pressures, traditional investments struggle to increase fund value, forcing policies to shift towards 'higher-yielding assets.' While alternative assets (such as private equity, real estate, cryptocurrencies, etc.) carry greater risks, their potential returns and ability to diversify asset correlations have attracted more pension managers. For example, California's public employees' retirement system (CalPERS) plans to add over $30 billion to private market investments, and the allocation of public pensions to alternative assets has increased from 14% in 2001 to nearly 40% in 2021.
By breaking regulatory barriers through executive orders, policy supporters believe that allowing 401(k) participants to choose from a wider array of higher-potential-return assets is a 'democratization of financial opportunity.'
Money does not immediately flow into crypto assets.
Previously, the investment list for 401(k) plans did not include crypto assets; this marks the first time policy has opened the door. Some believe that even if the 401(k) only allocates 2% of its funds, the crypto market could immediately gain $170 billion—almost equivalent to two-thirds of the total market cap of existing crypto spot ETFs and listed reserves.
However, this money cannot immediately flow into the crypto market; it is expected to take at least six months to two years for implementation. First, the Department of Labor must issue detailed rules, clarifying how 401(k) plans can invest in alternative assets, including proportion limits and product disclosures. Then, service providers will design compliant fund products that include crypto assets. Finally, employers will decide whether to add these new funds to the investment menu, and employees will then choose whether to allocate funds. It is clear that in this process, the likelihood of various crypto spot ETFs being included is the highest, as they are regulated and have relatively high liquidity.
However, critics of this policy have raised warnings, arguing that most alternative assets suffer from poor liquidity, high costs, low transparency, difficult valuation, and slow market exits, which may pose greater systemic risks, particularly when investors find it difficult to retrieve funds in an economic downturn. Additionally, whether the assessment standards for fiduciary responsibilities under the regulatory framework can effectively protect ordinary investors has become a focal point of current public discourse.
Both the U.S. and China have 'three pillars' in their pension systems, but there are significant differences in structure and development stages.
The issue of pensions is a common dilemma faced worldwide. When the U.S. announced the inclusion of alternative assets in 401(k) plans, China also adjusted its social security policies.
On August 1, the Supreme People's Court released a judicial interpretation clarifying that any 'private agreements' refusing social security contributions are invalid. Starting September 1, it will strictly pursue the legal responsibilities of violating employers. This not only safeguards individual rights but also ensures a stable inflow of pension resources from the policy source.
China's pension system adopts a government-led pooling structure, establishing a funding pool through mandatory contributions, which are centrally managed and paid out. In the face of increasing population aging and local fiscal pressures, 'expanding funding sources' has become one of the important means.
The policy introduced in China has a clear intention: to ensure the authenticity of the contribution base and the sufficiency of payments through legal enforcement mechanisms, thereby enhancing the size of the funding pool to address potential demographic challenges.
The pension systems in the United States and China both follow a 'three-pillar' model, jointly supported by the government, enterprises, and individuals—mandatory pensions led by the government, supplementary pensions provided by enterprises for employees, and personal savings for pensions.
However, there are significant differences in the funding scales of these three pillars between the two countries. In the U.S., the second and third pillars (401(k) and IRA) have a very large total scale, making them important sources of capital in the market. In China, the first pillar is the largest, while the second and third pillars are relatively small. Moreover, in the U.S., individuals typically have significant investment choices in the second and third pillars, allowing them to decide on their investment portfolios, which have become the primary source of pensions for most people. In contrast, individual investment autonomy is relatively limited in China, especially in corporate annuities.
This difference in funding scale and development stages has led to different policy directions in addressing pension challenges in China and the U.S.: Trump sought to increase individual choice and investment scope within the third pillar, while China aimed to ensure the stability of the first pillar's funding pool.
Similarly, compared to the U.S. reliance on market-driven returns, China focuses more on the stability and sustainability of the security system. This also reflects the differences in the institutional foundations of the two countries: China emphasizes social security and equity in its pension system, managed by the state; while the U.S. leans towards market mechanisms and individual choice.
The U.S. and China emphasize investment freedom and personal responsibility, while focusing on institutional rigidity and collective security. In the face of the global pension dilemma, they have proposed different solutions.