On Thursday, Senators Pat Toomey., Tim Scott, and Peter Meijer introduced the Retirement Savings Modernization Act. I – a new bill proposing alternative investments in 401(k)’s.
The act purports to “bolster Americans’ retirement savings by allowing workers in defined contribution plans, like 401(k)’s, to better diversify their portfolios and invest in higher returning asset classes.”
Noting that nearly seven times as many Americans are now enrolled in defined contribution (DC) plans compared to defined benefit (DB) pension plans, the bill’s sponsors add that DC plans underperform DB plans. It’s largely because DB plans “diversify investments across the full range of asset classes—just like most sophisticated institutional investors.”
“A full 89% of public DB pension plans like CalPERS and the Illinois State Board of Investment incorporate exposure to private equity, which is now the highest returning asset class in public pension portfolios (median annualized return of 15.1% over the past 10 years),” the politicos write.
The Retirement Savings Modernization Act amends ERISA to clarify that retirement plan sponsors may offer DC or DB plans that are prudently diversified across all asset classes, including both traditional and alternative assets.
More specifically, the act:
1. Clarifies that plan fiduciaries may select investment options that include a range of asset classes, including private equity. Nothing in ERISA currently limits the asset classes that may be included in a plan; this amendment clarifies that Congress intends to let investment professionals determine the appropriate range of asset classes.
2. Protects ERISA’s fiduciary standard. A unanimous U.S. Supreme Court has affirmed that ERISA’s fiduciary duties are “the highest known to the law.” Fiduciaries must still select investments through a prudent process, and the bill explicitly does not create a safe harbor from a fiduciary’s legal duties.
3. Promotes the prudent diversification of retirement savings plans. The bill does not require that plan participants have access to specific asset classes, but it provides fiduciaries with the tools to better ensure diversification.
It enjoys “broad industry support,” including from the Chartered Financial Analyst (CFA) Institute, the Small Business Investor Alliance (SBIA), the Defined Contribution Alternatives Association (DCALTA), the Institute for Portfolio Alternatives (IPA), and the American Securities Association (ASA), and the Securities Industry and Financial Markets Association (SIFMA).
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