Image source: Getty Images
Traditionally, workplace 401(k) accounts have been a safe place to save for retirement because you’re offered a limited selection of investments you can buy. For example, you may have a choice of around a dozen or fewer ETFs and mutual funds you can choose from.
Finance expert and YouTube personality Graham Stephan has warned that this could soon change. Stephan commented on Twitter that “Congress has just done the unthinkable with the introduction of a new act that allows riskier assets into 401k.”
Bonus Offer: Score up to $600 when you open this brokerage account
Discover: Best online stock brokers for beginners
Here’s why Stephan issued this warning, and what it means for you.
Stephan is right to be worried about proposed 401(k) changes
On Twitter, Stephan explained that Congress had recently proposed a law called the “Retirement Savings Modernization Act.” He said that lawmakers who introduced the legislation said the act would “ensure that ‘average investors have access to private markets and can diversify their holdings’.”
Stephan went on to provide more details. In particular, he warned that this law would end up opening the door to 401(k) users putting their money into investments they don’t currently have access to, including venture capital firms, private equity, real estate, and cryptocurrencies, among others.
This would be a major change. While IRAs can typically be opened with any brokerage firm and thus provide access to a wide variety of different assets to invest in, 401(k) investments have historically been much more restricted.
Stephan said that critics believe opening up the door to these riskier investments could have devastating financial consequences in terms of retirement readiness. He explained that many people opposed to the bill believe that investors would likely end up exposed to more risk, which could be a problem because “statistically, the average investor is terrible at picking their own investments.”
This change, in other words, could lead people without a lot of investing savvy to put their retirement savings at risk by buying “trendy, high risk assets.”
Is Stephan right?
Stephan is absolutely correct that widening the range of 401(k) investment options is a major change that could have damaging long-term effects. However, he did explain that the bill could also have some positive consequences as well — especially because it contains other provisions including one that makes enrollment in retirement plans automatic. And he’s right about that as well.
Ultimately, the important thing to remember is that the bill is currently just a proposal. It’s not likely to be passed prior to the midterm elections. And, after the elections take place, its future is still uncertain. Various pieces of the legislation could be changed or renegotiated including those addressing access to riskier investments. And ultimately, it may not pass at all.
If the proposed legislation does become law, it will become more important than ever for those who are investing for retirement to truly take the time to understand the risks and potential rewards of assets they are buying. While investors could possibly benefit from having more choices for where to put their retirement dollars if they put in the time to do necessary research, many people would likely be better off just sticking with the simple funds that 401(k)s are certain to continue offering.
Our best stock brokers for 2022
We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers for 2022.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
