401(k) Plans and Alternative Assets: Cryptocurrency and Private Equity Risks After the August 7, 2025 Executive Order

On August 7, 2025, President Trump signed an executive order broadening access to alternative assets like cryptocurrency and private equity in 401(k) plans. This move aims to enhance diversification and potential returns for retirement savers. However, it doesn't change ERISA's core fiduciary duties of prudence and loyalty. Plan sponsors are still required to carefully evaluate these options to ensure they're in participants' best interests.

Regulatory and Fiduciary Framework

Under the Employee Retirement Income Security Act of 1974 (ERISA), the federal law that sets standards for most private-sector retirement plans, including 401(k)s. Fiduciaries must act solely for participants' benefit with the prudence of an expert. They must act solely in participants’ interests and with the care of a prudent expert. Unlike individual investors who freely take on risk, 401(k) plan decision-makers are accountable for the investment options they offer. In fact, regulators and courts evaluating fiduciary decisions focus not on investment results but on the process fiduciaries followed in selecting and monitoring investments. Historically, this has made sponsors wary of alternative investments defined as investments beyond stocks, bonds, and mutual funds.

Recent guidance from the U.S. Department of Labor (DOL), the agency that enforces ERISA and oversees retirement plan regulations, reflects a nuanced evolution. In June 2020, the DOL issued an Information Letter affirming that 401(k) plans could include private equity investments within a diversified fund (for example, as part of a target-date fund), without automatically breaching fiduciary duties. However, the DOL emphasized that fiduciaries must undertake rigorous analysis and understand private equity’s distinctive characteristics (such as complexity, liquidity constraints, and fees) before proceeding.

Soon after, in December 2021, the DOL published a Supplemental Statement urging caution with private equity in 401(k)s. This statement noted that the 2020 letter highlighted potential benefits of private equity but did not address countervailing risks, such as valuation challenges and the possibility that 401(k) participants may need to withdraw money sooner than the long time horizon typical for private equity investments. The DOL stressed that only plan fiduciaries with sufficient expertise (or access to experts) should consider private equity, and even then only in limited, carefully managed ways.

In March 2022, the DOL took a far more skeptical stance toward cryptocurrency in retirement plans. Through Compliance Assistance Release 2022-01, it urged 401(k) fiduciaries to “exercise extreme care” before offering any cryptocurrency option to participants. This was the agency’s first formal guidance on crypto investments, and it pulled no punches. The release outlined a long list of concerns, explored in detail below, and went so far as to announce that the DOL would launch investigative programs targeting plans that ventured into this space.

The message was clear: regulators viewed cryptocurrency in 401(k) plans as inherently suspect. The warning had an immediate impact. One plan provider’s decision to offer a Bitcoin fund drew swift and public rebukes from officials, while a group of U.S. Senators questioned whether such high-risk products belonged in retirement savings vehicles at all.

By contrast, courts have been more measured when reviewing alternative assets in defined contribution plans. In 2025, the Ninth Circuit, in Anderson v. Intel, upheld the inclusion of private equity when it was part of a diversified strategy and prudently selected, reaffirming that process, not asset type alone, drives fiduciary compliance.

Risks of Private Equity in 401(k) Plans

Private equity involves taking stakes in non-public companies, often through pooled funds. While these investments are often marketed as a source of diversification and higher potential returns, they are not without risks for many 401(k) plans.

Illiquidity

One of the biggest challenges is illiquidity. Private equity is generally a long-term, illiquid investment. Money committed to a PE fund may be locked up for many years, with redemptions allowed only after several years or under very limited conditions. Unlike mutual funds or stocks that can be sold daily, PE funds do not provide the same ready access to capital. This can pose a problem for 401(k) participants who may need to rebalance or withdraw funds when changing jobs or retiring. If participants cannot easily access or transfer out of a private equity investment, the plan could fail to meet its liquidity needs.

Complexity

The complexity of private equity adds another layer of difficulty. Fund structures and strategies are often sophisticated, involving leveraged financing, multi-layered partnerships, and intricate investment techniques. The organizational terms and financial arrangements can challenge even experienced investors. For plan fiduciaries, this means heightened due diligence requirements. Not every plan committee will have the necessary expertise to fully evaluate the risks, and the DOL has emphasized that fiduciaries must assess whether they, or their advisors, have the “necessary capability, experience and stability” to oversee private equity before proceeding. If a plan sponsor does not fully understand how a private equity investment works, the potential for mistakes and mismanagement increases significantly.

High Fees

Fees in private equity are higher than in traditional public market investments. Management fees of around two percent per year, combined with performance-based carried interest of approximately twenty percent, can substantially erode returns. When compared to low-cost index funds, the difference in net performance can be stark, and these higher costs would need to be justified under ERISA’s reasonableness standard.

Valuation Challenges

Valuation challenges further complicate matters. Because private equity holdings are not publicly traded, their valuations are infrequent and often based on estimates rather than market prices. Participants will not see daily pricing. Instead, valuations might be quarterly or annual, based on appraisals or internal models. This lack of transparency makes it more difficult for participants to track their investments and for plan sponsors to provide accurate account statements.

These valuations can also lag behind actual market conditions or reflect subjective judgments. As the Financial Times has noted, in periods of market stress or reduced buyer activity, reported Net Asset Values (NAVs) may overstate what the assets could realistically fetch if sold. Without public trading data, managers rely on assumptions about earnings, comparables, or exit opportunities…assumptions that can vary widely between firms. When these estimates are later adjusted to match market realities, the result can be sudden markdowns and “below-NAV” surprises that catch participants off guard.

Furthermore, private companies are not subject to the same disclosure requirements as public companies, leaving participants with far less visibility than they would have with mutual funds or stocks.

The average 401(k) saver is not a professional investor, and private equity’s complexity and specialized jargon, terms like capital calls, carried interest, and vintage years, can cause confusion. Without participant education, there is a risk that participants will underestimate the dangers, overestimate the potential returns, or misunderstand what they are investing in. Some may allocate a large portion of their account to a PE fund without realizing it cannot be readily accessed or that performance is uncertain. If the investment underperforms, participants may claim they were inadequately informed, creating legal exposure for fiduciaries. This is why clear, plain-English explanations of both the purpose and the risks of any private equity option, like the best legal writing, are essential if it is offered.

Operationally, private equity poses hurdles for daily-valued plans. The mechanics of capital calls, irregular valuations, and liquidity constraints do not fit easily into systems designed for daily transactions, and these issues can trigger regulatory complications.

Private equity exhibits significant opacity compared to most traditional retirement fund investments.

Finally, there is the risk of litigation. Even if private equity theoretically could enhance returns, it can invite lawsuits in ways that traditional funds might not. Plaintiffs’ lawyers are alert to the potential for underperformance and high fees, and are already prepared to challenge plan fiduciaries who include such options. If a private equity fund in the plan performs poorly or fails to match simpler alternatives, participants could claim that fiduciaries acted imprudently. This is not a theoretical concern, it is one of the main reasons relatively few plan sponsors adopted private equity after the DOL’s 2020 information letter, despite it being permitted. No plan sponsor wants to become a test case in court over the inclusion of a complex, high-fee fund. The safest path, for those who proceed, is to limit private equity to a modest allocation, generally five to fifteen percent, within a diversified fund, ensure all disclosures are in plain language, and document every stage of the decision-making process.

In light of these risks, plans considering private equity may want to proceed with some care. Fiduciaries might limit offerings to well-diversified investment options. For instance, they could include private equity as a modest slice, say 5-15%, of a target-date or balanced fund managed by professionals to help address liquidity and volatility concerns. Additionally, plan sponsors could explore setting allocation limits on participant accounts. They might provide robust plain-language disclosures about risks. Requiring participant acknowledgments could be another step. Engaging experienced consultants or advisors for due diligence on proposed funds, along with thorough documentation of the decision-making process, may also be helpful.

If fiduciaries determine that benefits like diversification and potential higher returns for long-term investors outweigh the downsides, that conclusion should be supported by detailed analysis. Ongoing monitoring must follow. Private equity is not a "set it and forget it" option as it comes with significant considerations.

Risks of Cryptocurrency in 401(k) Plans

Unlike traditional asset classes such as stocks or bonds, which have longer established performance records, cryptocurrencies lack comparable historical data. They do not generate cash flows or possess inherent value in the same manner as equities backed by company earnings or bonds that provide interest payments; instead, their prices are determined by market trading dynamics.

A primary concern is the asset class's pronounced volatility. Cryptocurrency prices can experience significant fluctuations, often exceeding those seen in conventional markets, which may pose challenges for 401(k) participants, particularly those approaching retirement who require more stable account values for withdrawals or distributions.

Participants may also face difficulties in making informed investment decisions. Cryptocurrencies are frequently promoted through discussions of technological innovation and narratives of substantial gains, potentially leading to heightened interest driven by factors such as fear of missing out. However, distinguishing reliable information from promotional content can be complex, even for experienced investors, given the technical nature of many digital assets and projects. This could result in participants allocating funds without a full understanding of the associated implications within a retirement plan context.

Cybersecurity risks further complicate the inclusion of cryptocurrencies. Platforms and exchanges handling these assets have been vulnerable to hacks, with notable incidents in 2025, such as the ByBit hack and others contributing to losses exceeding $3.1 billion in the first half of the year alone, often involving advanced techniques like AI-powered attacks and phishing. Such events introduce technological vulnerabilities not typically encountered in traditional 401(k) investments, potentially affecting plan holdings.

Valuation and pricing present additional considerations due to the fragmented nature of cryptocurrency markets. Prices can vary across different exchanges, influenced by factors like thin liquidity, large holder activities, or questionable trading volumes. This fragmentation may lead to unreliable or inconsistent valuations, which is particularly relevant for 401(k) plans that depend on accurate daily marking to market for account reporting, loans, and withdrawals. Near retirement, inaccurate pricing could result in participants receiving values that do not reflect current market conditions, impacting the reliability of their savings.

Conclusion

The executive order issued on August 7, 2025, expands potential access to cryptocurrency and private equity within 401(k) plans. Under ERISA, fiduciaries are required to exercise prudence in their decisions. These alternative assets may provide diversification opportunities, though they also involve notable risks that could impact participants and raise liability concerns. Traditional investment options often meet the requirements of many plans. Plans that choose to incorporate such assets might consider measures like restricting exposure, offering detailed participant education, and maintaining comprehensive records. Consultation with legal experts can help ensure conformity with ERISA standards.

Recently, Harvard and Yale’s endowments have sold portions of their holdings, including venture and growth equity positions, through the secondary market. Public reporting attributes these sales to a mix of portfolio rebalancing, liquidity management, and potential tax changes affecting large endowments. While these actions do not necessarily signal a wholesale retreat from private equity, they may demonstrate the asset class’s long-term commitment requirements and the importance of active portfolio management, even for investors with substantial resources and experience.

De Silva Law Offices has long provided strategic, discreet representation to investors in high-stakes disputes. Contact us to discuss protecting your interests in the financial markets.

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