Stop "imagining" how American pensions work, listen to experts evaluate the addition of Crypto Assets to 401(k).

Original Title: "401(k) Plans Will Get More Fun"

Original author: Matt Levine

Original text compiled by: jk, Planet Daily

401(k) plan

The traditional retirement savings method is as follows: you work at a company for several 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 every month, and to fulfill this obligation, the company will set aside money to invest, ensuring there are sufficient funds to pay your pension. If the investment makes a profit, the company has extra funds to keep; if the investment loses money, the company has to dig into its own pockets to make up the amount owed to you. This situation is not good for the company (having to spend extra money), and it is not good for you either, as it exposes you to credit risk. In the United States, there is a law called ERISA (Employee Retirement Income Security Act), which requires companies to prudently manage pension funds and, as trustees for retired employees, to ensure that the money is not lost.

Another way to save for retirement is: you work at a company for several decades, the company pays you a salary, and you take a portion of your salary to invest in savings. After retirement, the company does not pay you a pension—you have no pension—relying entirely on the money you previously invested to live. If your investments go well, you have enough money to live and even some extra; if your investments fail, not having enough money is your own issue, and it has nothing to do with your employer. If you want, you can even invest all your money in Meme stocks or sports betting, taking a big gamble, though the result might be quite disastrous.

But in the United States in 2025, the most mainstream retirement savings method is the third one—401(k) plan, which is between the first two. In this method, you do not have a pension, and the company will not pay you a fixed salary after retirement. Like the second method, you have to save and invest money yourself each year (the company may subsidize some money into your investment). However, unlike the second method, you cannot invest freely; you cannot put money into sports betting or your brother-in-law's vending machine business. The company will provide you with a menu of investment options, and you can only choose from it. [1] The company, as a trustee, is obliged to provide you with reasonable and prudent investment choices. If there is an option on the menu that says "We will put all your 401(k) assets on red in Las Vegas," and you choose this, and the ball lands on black, all your retirement savings are gone, 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. Employers have a fiduciary duty to guide employees in their investments and cannot allow them to act recklessly. This also falls under the jurisdiction of ERISA, which seems somewhat coincidental historically. In the past, companies provided pensions and had to manage them carefully, thus accumulating expertise in retirement investments. Now, retirement savings require employees to make their own investment decisions, but companies still hold the expertise in retirement investments, while individual employees sometimes prefer to take risks. Therefore, companies need to play a parental role, guiding employees' investment decisions to prevent them from losing all their money. If companies do not take this role seriously, they may be sued.

The key here is "would be sued". The standards for what constitutes a prudent investment that can be included in a 401(k) plan have been changing. In the 19th century—when there were no 401(k) plans or ERISA—courts sometimes viewed investing in common stocks (as opposed to government bonds or mortgages) as imprudent, which could lead to trustees being sued. When index funds were first introduced in the 1970s, some employers were hesitant to invest, fearing that investing in all stocks without conducting due diligence on each stock would violate their fiduciary duty.

By 2015, I had written "Regulatory perspectives are coalescing"—particularly the U.S. Department of Labor, which oversees 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 often underperform indices and charge significantly higher fees than index funds, so buying index funds may be a more prudent choice than hiring active managers.

This viewpoint is not universally agreed upon. The company's 401(k) plan still frequently offers actively managed mutual funds, but there is indeed pressure to provide index funds, and even greater pressure to control fees. Everyone knows that investing carries risks; the funds on the 401(k) menu losing money is not necessarily the employer's fault. However, if the fees for the funds on the menu are double those of other almost identical funds, it does seem imprudent and could lead to lawsuits.

Recently, ESG investment (Environmental, Social, and Governance investment) has become the center of controversy regarding 401(k). In January, we talked about how American Airlines Group got into trouble because of ESG issues related to 401(k). American Airlines didn't even offer ESG funds in their 401(k) plan — just regular low-cost index funds — but these funds are managed by BlackRock, which has frequently talked about ESG in the past. A judge in Texas deemed it imprudent to use employees' money for ESG.

Now when people discuss what should and shouldn't be included in the 401(k) plan, the main focus is:

Private equity, private credit, and cryptocurrency.

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, and if an employer carelessly allows you to invest in losing options, you can sue the employer. Therefore, employers tend to only provide investment options that are clearly "prudent" under current standards. In 2025, index funds are clearly considered prudent. ESG funds are a bit unclear in 2025. 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 cautious, but the standards have changed, and it is now considered cautious." This is not a financial-level answer. It is not that private equity and cryptocurrency are still very volatile and expensive in 2024, and suddenly there has been a structural change that makes them safe and cheap. Rather, in 2024, the U.S. federal government is skeptical about the opaque high fees in cryptocurrency and 401(k) investments, and in 2025, with a new government that likes these things. This shift is now becoming formal policy:

President Trump signed an executive order on Thursday allowing private equity, real estate, cryptocurrency, and other alternative assets to enter the 401(k) plan, which is a significant victory for industries looking to tap into about $12.5 trillion in retirement account funds.

According to informed sources, the order will instruct the Department of Labor to reevaluate the guidance on alternative asset investments in retirement plans governed by the Employee Retirement Income Security Act of 1974. The Department of Labor also needs to clarify the government's position on fiduciary responsibilities related to 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 hindered alternative assets from entering most employees' defined contribution plans. Retirement portfolios are primarily focused on stocks and bonds, partly because plan sponsors are reluctant to risk investing in products that are illiquid and structurally complex...

Alternative asset and traditional asset management companies are eager to get a piece of the defined contribution market, viewing it as the next frontier for growth. Many institutional investors, such as U.S. pension funds and university endowments, have reached their internal limits on investments in private equity amid a backdrop of slowing trading and a lack of funds to allocate to clients.

From a fundamental perspective, it makes sense to put illiquid private assets into a 401(k): the core idea of a 401(k) is to put money in until retirement to take it out, so you don’t need liquidity. If illiquid assets have a premium return, you should earn that money. Moreover, the private market is the new public market: as Byrne Hobart pointed out, "Private equity plus the companies owned by public markets look a lot like those companies that would have gone public 30 years ago." So if owning stocks in a 401(k) is prudent, owning private equity also makes sense.

On a deeper level, "the financial industry wants to sell products to individual investors because they can no longer sell them to institutional investors, and the fees are very 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 these products; of course, this is not investment advice. When cryptocurrency management companies are eager to sell to you, it may also be some kind of signal.

That being said, I'm not sure to what extent this is a story about the rise of private assets (and cryptocurrencies) and to what extent it's a story about the decline of paternalistic management. Overall, outside of 401(k), Americans now have far more and more stimulating investment options than they did a few years ago. You used to be able to buy stocks, and now you can buy meme stocks, which is even more ridiculous. You can buy options that expire the same day. You can engage in various private credit activities. You can buy 10x leveraged perpetual cryptocurrency futures on Coinbase. You can even— I really can't emphasize this enough— sports bet in your brokerage account. You still can't buy tokenized shares of OpenAI, but give it another month.

Driven by cryptocurrencies, meme stocks, and legitimate 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. People more widely accept that you should certainly be able to make all sorts of crazy bets in your investment account; a little excitement is a good feature of the financial markets, and providing you with some entertaining bets is a good function of the financial system. If that's the case, then the 401(k) system will also offer you some of those bets.

By the way: You can still buy low-cost broadly diversified 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) in the foreseeable future. But your 401(k) plan may offer you some additional, crazier options. If you choose those and things go badly, that's your own problem.