Original title: (401(k) Plans Will Get More Fun)
Original author: Matt Levine
Original translation by: jk, Planet Daily
401(k) plans
The traditional retirement savings model is as follows: you work at a company for decades, the company pays you a salary, and when you retire, the company continues to pay you a pension. The company is obligated to pay you a fixed amount each month, and to fulfill this obligation, the company sets aside money to invest, ensuring there is enough to pay your pension. If the investments are profitable, the company has surplus funds to keep; if the investments lose money, the company must make up the difference out of pocket. This situation is not good for the company (having to pay extra money), and it's not good for you either, as it exposes you to credit risk. There is a law in the U.S. called ERISA (Employee Retirement Income Security Act), which requires companies to manage pension funds prudently and, as fiduciaries for retired employees, not to lose the money.
There is another way to save for retirement: you work at a company for decades, the company pays you a salary, you set aside a portion of your salary for savings and investment, and after retirement, the company does not provide you with a pension—you have no pension—it's all up to the money you invested earlier to sustain your living. If you invest well, you have enough money and a surplus; if your investments fail, not having enough money is your own business, and it has nothing to do with the employer. If you want, you can even invest all your money in meme stocks or sports betting, going for a big win, although the outcome might be disastrous.
But in the United States in 2025, the most mainstream way to save for retirement is the third option—the 401(k) plan, which is in between the first two. In this model, you do not have a pension, and the company does not provide you with a fixed salary after retirement. Like the second option, you must save and invest money each year (the company may subsidize some of your investments). However, unlike the second option, you cannot invest freely; you cannot put money into sports betting or your brother-in-law's vending machine business. The company will give you a menu of investment options from which you can only choose. As a fiduciary, the company is obligated to provide you with reasonable and prudent investment options. If there is an option on the menu that says 'we will bet all your 401(k) assets on red in Las Vegas,' and you choose this option, resulting in the ball landing on black, and you lose all your retirement savings, you can definitely win a lawsuit against your employer. (This is not legal advice.)
In other words: individuals are responsible for their own retirement savings, but not entirely responsible. Employers have a fiduciary duty to guide employees in investment and cannot allow them to act recklessly. This also falls under ERISA's jurisdiction, which seems somewhat coincidental in history. In the past, companies provided pensions and had to manage them prudently, accumulating expertise in retirement investments. Today's retirement savings require employees to make investment decisions, but companies still hold expertise in retirement investments, while individual employees sometimes just like to take risks. So companies must play a parental role, guiding employees' investment decisions to prevent them from losing all their money. If the company does not seriously fulfill this role, they can be sued.
The key here is 'can be sued.' The standards for what constitutes prudent investments that can be included in 401(k) plans have been changing. In the 19th century—when there were no 401(k) plans or ERISA—courts sometimes viewed investing in ordinary stocks (as opposed to government bonds or mortgages) as imprudent, and fiduciaries could be sued for this. When index funds were first introduced in the 1970s, some employers were hesitant to adopt them, fearing that investing in all stocks without conducting due diligence on each stock would violate their fiduciary duty.
By 2015, I had written that 'regulatory views were coalescing'—particularly from the U.S. Department of Labor responsible for ERISA—believing that 'index funds are good and should be encouraged; active management is bad and should be resisted.' The logic is:
Actively managed stock funds typically do not outperform indexes and charge much higher fees than index funds, so buying index funds may be more prudent than hiring active managers.
This view is not universally accepted; actively managed mutual funds are still often offered in company 401(k) plans, but there is indeed pressure to provide index funds, with greater pressure to control costs. Everyone knows investing carries risks, and the funds in the 401(k) menu losing money may not necessarily be the employer's fault. However, if the funds in the menu charge twice as much as other nearly identical funds, that certainly seems imprudent and could lead to lawsuits.
Recently, ESG investing (Environmental, Social, and Governance investing) has become a contentious point in 401(k)s. We talked in January about how American Airlines Group got into trouble over ESG issues in their 401(k). American Airlines didn't even offer ESG funds in their 401(k) plan—just ordinary low-cost index funds—but these funds were managed by BlackRock, which had frequently discussed ESG, and a judge in Texas believed that using employee money for ESG was not prudent.
Now when people discuss what should and shouldn't be included in 401(k) plans, the main focus is:
Private equity, private credit, and cryptocurrencies.
The core issue is not whether you should be allowed to invest in these things, but whether you can sue your company if you lose money investing in them. Because the 401(k) system has both personal investment choices and paternalistic management by employers, if an employer carelessly allows you to invest in losing options, you can sue them. Therefore, employers tend to only provide investment options that are clearly considered 'prudent' under current standards. By 2025, index funds are clearly considered prudent. ESG funds in 2025 are somewhat unclear. But what about private equity and cryptocurrencies? Is it considered prudent for employers to include these in the 401(k) menu?
The obvious answer is 'last year was not considered prudent, but the standards have changed, and now it is.' This is not a financial-level answer. It is not to say that private equity and cryptocurrencies were still very volatile and expensive in 2024, and suddenly there has been a structural change making them safe and cheap. Rather, in 2024, the U.S. federal government was skeptical about cryptocurrencies and high-fee opaque investments in 401(k)s, but in 2025, a new government that likes these things came in. This shift is now becoming formal policy:
President Trump signed an executive order on Thursday allowing private equity, real estate, cryptocurrencies, and other alternative assets to enter 401(k) plans, marking a significant victory for industries looking to tap into approximately $12.5 trillion in retirement account funds.
According to informed sources, the order will direct the Department of Labor to reassess the guidance regarding investments in alternative assets within retirement plans governed by the 1974 Employee Retirement Income Security Act. The Department of Labor will also need to clarify the government's position on fiduciary responsibilities related to providing asset allocation funds that include alternative assets...
Senior officials in Washington have been considering this directive for several months, aiming to alleviate long-standing legal concerns that have prevented alternative assets from entering most employees' defined contribution plans. Retirement investment portfolios are primarily focused on stocks and bonds, partly because corporate plan managers are reluctant to take risks with illiquid, complex products...
Alternative assets and traditional asset management companies are eager to carve out a share of the defined contribution market, viewing it as the next frontier for growth. Many institutional investors, like U.S. pension funds and university endowment funds, have reached internal limits on their investments in private equity amid a backdrop of trading slowdown and lack of capital allocation to clients.
From a fundamental perspective, it makes sense to put illiquid private assets into 401(k)s: the core idea of a 401(k) is to put money in until retirement and then withdraw it, so you do not need liquidity. If illiquid assets have premium returns, you should be able to earn that money. Moreover, the private market is the new public market: as Byrne Hobart pointed out, 'private equity combined with publicly traded companies looks a lot like the companies that would have gone public 30 years ago,' so if holding stocks in a 401(k) is prudent, then holding private equity also makes sense.
On a deeper level, 'the financial industry wants to sell things to individual investors because they can't sell them to institutional investors, and the fees are high'—this is simply the worst advertisement for investment products. When the most astute asset management companies are eager to sell you something, you should consider that maybe you shouldn't buy it, of course, this is not investment advice. When cryptocurrency management companies are eager to sell you something, this might also be a signal.
That said, I'm not sure to what extent this is a story of the rise of private assets (and cryptocurrencies) and to what extent it is a story of the decline of paternalistic management in 401(k)s. Overall, outside of 401(k)s, Americans now have many more exciting investment options than they did a few years ago. You could buy stocks before, now you can buy meme stocks, which is even more absurd. You can buy options that expire the same day. You can engage in various private lending. You can buy 10x leveraged perpetual cryptocurrency futures on Coinbase. You can even, I really can't emphasize this enough, place sports bets in a brokerage account. You still can't buy tokenized shares of OpenAI, but give it another month.
With the push from cryptocurrencies, meme stocks, and legal sports betting, the general perception of what ordinary people should invest in, what they should be allowed to invest in, and what they might enjoy investing in has changed. There is a broader acceptance that you should certainly be able to take various crazy bets in your investment accounts, and a little excitement is a good feature of financial markets, providing you with some entertaining betting opportunities is a good function of the financial system. If this is the case, then the 401(k) system should also provide you with some of these bets.
By the way, you can still buy low-cost broad public stock index funds! You can buy them in your personal brokerage account—right next to the 'sports betting' button—and you will also be able to buy them in your 401(k) for the foreseeable future. But your 401(k) plan may offer you some additional, crazier options. If you choose these and the outcome is poor, that is your own issue.