Trump opens retirement to crypto

0:00Hey, Swamp Notes listeners, it's Mark Filippino. I'm off this week, but wanted to let you know that this show will have a new upload day in a couple of weeks. Pretty soon, we're going to start publishing Swamp Notes on Fridays instead of Saturdays to bring you the news and analysis from Washington even faster. So look out for that soon, and I hope you enjoy this week's episode.

0:24Last week, U.S. President Donald Trump handed two huge industries a massive win. He opened private equity and cryptocurrency companies up to trillions of dollars in new investments, dollars coming in from millions of Americans saving for retirement. The move could potentially reshape the financial future of those Americans. It also stands to supercharge the growth of asset managers and crypto groups who have been courting the president for months.

1:00This is Swamp Notes, the weekly podcast from the Financial Times where we talk about all of the things happening in U.S. politics, finance, and the economy. I'm Brooke Masters, the FT's U.S. Managing Editor, in for Mark Filippino. And this week we are asking, How is Donald Trump changing the U.S. retirement system? Here with me to discuss is Sujit Indap. He's the FT's Wall Street editor. Hello, Sujit. Hi, Brooke. And we also have Elizabeth de Fontenay, a law professor at Duke University. Professor de Fontenay, welcome. Thank you for having me. Sujit, let's start with you. Tell me about the president's executive order.

1:42What did it do? Sure. So the president signed this order last week, which essentially freed retirement plans known as 401ks in the U.S. to more freely allow these private assets to be placed in portfolios. It reduced the litigation risk and essentially just opened up private markets to these accounts, which typically had been in public stocks and bonds historically. Professor, you've studied this space for a while. Can you tell me what the reaction was from people who know the sector? Did anyone see it coming? The industry has been pushing for this quite a long time, and there was already a sense that the administration was very receptive to this.

2:27And so it did not come as a surprise, but it did come as a bit of a shock in the sense that many people, including people inside the industry, don't think that this is going to be a great idea for people's retirement portfolios. So why should people with retirement accounts care about this? They should care because historically it has been very hard for retail investors to pick high-performing funds when they do actually have choice over the matter. In fact, the track record there is very, very bad. And what has served retirement investors incredibly well over decades has been index funds. So no one in the world, with few exceptions, has done better than ordinary retail investors who just indexed the U.S.

3:11public markets over the last few decades. And so whenever we switch from a merely passive investment where 401k investors are going to have to choose among different funds, there all of a sudden the performance gets much worse and the fees get much worse. And that is, I think, what everyone is concerned about. But institutional investors put lots of money in private markets. Why shouldn't ordinary people? That is, I think, the biggest misconception here. And it is because this is one that has been pushed by the industry for a long time. So the sense that retail investors have been really missing out by not being able to invest in the private markets.

3:47If anything, most people think that either there is no outperformance at all anymore, or that outperformance is quite marginal. And that makes perfect sense. The more money that has poured into this asset class, of course, the returns are going to go down. And now there is so much money in the private markets that it makes sense that essentially those have kind of equalized between the public and private markets. So what we're saying is ordinary people are going to get in just when it's not so interesting. That is exactly right. So if you actually talk to these big institutional investors who are invested in the private markets, all of them are incredibly dissatisfied with their private markets investments right now.

4:27They are stuck in these illiquid investments that the private equity funds and venture capital funds can't seem to offload. And so this would, in fact, be the worst time for retail investors to come in. They really would just be bailing out the existing investors in the private markets, not in any way, shape or form doing themselves a favor. That begs the question of why. Trump has made deregulating crypto and bringing in private markets a big focal point of his administration. He credits the industry with helping him win the election. Sujit, why is this happening? So if you think about the private markets industry now, it's obviously really big, manages trillions of dollars, but it is relatively mature on the institutional side, as Professor de Fontenay just said.

5:19And so especially amongst the big public alternative managers, the Apollos, the KKRs, the Blackstones, their traditional channels, institutions, pensions, endowments, sovereign wealth funds, those are kind of tapped out. This retail pocket is really the last place left for them to keep growing. And so they have made this incredible effort called education or propaganda saying, hey, you ordinary 401k investor, look at these great private market returns historically. You really need access to those. And if you don't get those, you're going to be worse off. The Trump family is also really interested in crypto themselves.

6:00Does that play any role, Suji? It does. So they have their own crypto fortune in various places. We've written a lot about that at the FT. They have various coins. They're close to various large crypto players. And we had an interesting fact in a story the FT wrote a couple of days ago that, in fact, the traditional private equity, private assets industry was worried that the taint of crypto would ultimately harm the private asset, the traditional private assets industry, because if there's a big crypto winter again, a disaster in coins, that, in fact, that's going to taint the entire private assets industry.

6:34There's also a question of exactly what it is that people can invest in. Private equity is what everyone talks about, and crypto obviously is in the headlines as well. But there are other things you can buy now with your retirement accounts. What kinds of things are we talking about? Yeah. So if we think about private assets, generally, obviously private equity is like the big legacy product. But also there's a private credit, which is the idea of making these corporate loans to companies. And some of those are risky, Some of those are less risky. There's infrastructure, which is like tunnels and roads and increasingly data centers.

7:07There's real estate. It's all these things that are supposedly long dated and, you know, have long time horizons. And supposedly that aligns with retirements, which, you know, are decades away. Professor, is it good and proper for retirement accounts to be putting their money in these assets? A lot of this turns on the form. So let's imagine for a minute that the private assets in general, on average, are outperforming the public markets, something that, as I said, is very much up for debate right now. Let's imagine that that's true. Then we have the further problem that, unlike the public markets, there is absolutely no way to index the private markets.

7:50And so necessarily, you're going to have to pick a fund manager who goes and buys private assets, And that fund manager is going to only be able to have access to one slice, a very small slice of the private markets. And so what you're going to see is something that you never get when you're indexing the public markets, which is a big dispersion in returns. So some lucky investors might do well. Some unlucky investors might do very, very poorly. And that is not typically something, a form of risk that we encourage for retirement accounts. That seems like a very bad outcome, particularly when it's clearly the case that retirement managers, so benefits people working at different companies and so on, have, as I said before, a very, very bad track record of actually picking funds, actively managed funds to include in their portfolios.

8:41You mentioned earlier there's also a question of cost. Why is that an issue with private market funds? The issue there is that because these are purely actively managed funds, the fees that are paid are quite high. And so institutional investors are very familiar with this environment. They can have negotiating leverage vis-a-vis the managers. And they themselves have significant concerns about the level of these fees versus the performance of the funds. With retail investors, again, this is just not something that they're used to dealing with. And in fact, the fees really can eat into investors' returns.

9:18And they are poorly equipped to even have access to what these fees that are going to be charged ultimately are and to understanding how that fits in with this environment. So kind of think about what you're saying. Some lucky investors might end up owning a fund that does really well, but a lot of others will get indifferent performance at best. And they will be getting less of that indifferent performance because of the higher fees. Is that right? Right. That is exactly right. And we see that already with institutional investors, that some institutional investors have access to the best managers, the best funds, and their performance is good.

9:57But you have lots of pension funds that actually have done very poorly by investing in private equity, private credit, venture capital, and so forth, and that have really trailed the public markets. And so what we're signing people up for is, at best, that kind of performance, most likely worse because, again, retail investors tend to suffer from adverse selection here and get the worst products. The Trump administration took the first steps to make this actually happen on Tuesday. What was it? What happens next? The risk for the industry, and this was mentioned earlier, was just the idea that you could be subject to litigation or you could be sued for making poor investment decisions and choices.

10:38So this is a Department of Labor rule that eases that litigation risk. So what's expected is that the DOL and to some extent also the SEC will revisit all of their existing guidance and all of their existing rules that constrain 401k investors' ability to invest in private assets. What's interesting, though, is that there's a common belief that the litigation risk really has been or will be removed, but that's actually not something that can be done entirely by the DOL. If there is, in fact, a major wave of new retail money coming into the private markets, undoubtedly what is going to follow are a lot of lawsuits.

11:18And the Department of Labor can't on its own prevent those lawsuits. The courts are going to have to look at this and see whether the retirement laws are, in fact, being followed and retirement managers are doing what they're supposed to do under the law to satisfy their obligations to retirement investors. And so I do think inevitably there will be large numbers of lawsuits over this. And the question, of course, is, is it appropriate to put retirement investors in these funds that have very high fees, uncertain performance, highly variable performance, and that are invested in very illiquid assets, which again is something that retirement investors and particularly retail investors are not well-suited to bear.

12:02I want to thank our guests. Sujit Indep is the FT's Wall Street editor. Thanks, Sujit. Great to be here, Brooke. And Elizabeth Defontenay is a professor of law at Duke University. Professor, thank you. Thanks for having me. All right, we're going to take a quick break, and when we come back, we're going to do exit poll.

12:37We are back with Exit Poll, where we ask an FT journalist one of your questions. This week, we have a question from Megan, who writes, My question is about the Trump administration's interest in domestic semiconductor manufacturing. To what extent do you think the push to bring the semiconductor supply chain home is driving other policy priorities, for example, in trade, international engagement, and domestic spending? Thank you, Brooke. I'm Joe Miller, one of the FT's Washington correspondents. The answer is actually quite a difficult one because, as with many policy issues, the Trump administration's stance towards domestic manufacturing of semiconductors is utterly confused.

13:24We had Donald Trump earlier in the year call the CHIPS Act, which was this enormous bipartisan act passed under the Biden administration in order to encourage the reshoring of semiconductor capability and indeed offering enormous subsidies to companies pledging to make semiconductors in America. He called it a horrible thing. And he has since allowed American companies like NVIDIA to export some of their chips to China, for example, in exchange for a slice of the profits. And so it's unclear whether his national security concerns have evaporated or whether this is all just a way of making money for the American government.

14:11What we can say is that Trump has definitely floated the idea of massive tariffs on the imports of semiconductors. And he has talked about helping Intel, for example, with its domestic capabilities and its plans to develop semiconductors in the US. But as with many things out of this White House, it's very difficult to identify my coherent policy. Megan, I hope that answers your question. And if you, listening now, have a question about U.S. politics and the economy, send a message to the email in the show notes. Make sure to include who you are and where you're writing from. This was Swamp Notes, the U.S.

14:56politics show from the FT. If you want to sign up for the Swamp Notes newsletter, we've got a link to that in the show notes. Our show was produced by Henry Larson. We had help this week from Mark Filipino, Katya Kumkova, and Greg Buyo. Special thanks to Pierre Nicholson. I'm Brooke Masters. Our acting co-head of audio is Topher Forges. Original music by Hannes Brown. Check back next week for more U.S. political analysis from the Financial Times.

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