A new asset class has landed in America’s most popular retirement account: property.
In early August, President Trump signed an executive order to encourage the use of alternative assets in 401(k) plans, including investments in cryptocurrency, private equity, and real estate. This groundbreaking move could open up entirely new investment categories to American workers.
Historically, 401(k) investment options have primarily included a mix of stocks and bonds. While institutional investors and high-net-worth families have long used alternative assets, they have largely remained out of reach for individual savers. The White House claims this is “democratizing access” to wealth-building opportunities, yet do Americans really need more exposure to property? And how could this impact the US real estate market?
Financial advisors share what Americans need to know about this emerging opportunity, including the likely economic impact of opening the door to real estate in 401(k) plans.
Reallocating the Dream
Once the cornerstone of the ‘American dream’ and a key means to wealth building, homeownership in the US has become prohibitively expensive.
There were 45.6 million renter-occupied housing units in the US in 2023, up from 39.7 million in 2010, per the Census Bureau’s American Community Survey. Meanwhile, Urban Institute projections show the share of people 65 and older who rent will grow from 22% in 2020 to 27% in 2040, an extra 5.5 million renting households.
With “renters for life” on the rise, a whole group of investors who may never own a home may gain a new way to invest in property.
“This could be a meaningful step forward for everyday investors, especially those using Solo 401(k)s,” says Emilio Cabuto, Financial Planner at Verus Capital Partners. “It opens access to an asset class that’s typically been reserved for institutions or high-net-worth individuals.”
While this reform could create more ‘property owners’, it could, by the same token, make it harder for Americans to buy property outright. Owning property on paper is not the same as holding the keys to one’s own home.
“Easier 401(k) access to real estate funds could increase competition for single-family homes, small multifamily, and small commercial properties,” says Cynthia Meyer, Founder of Real Life Planning. “Institutional investors would be more likely to pay cash for a small apartment building, for example, which could crowd out local investors.”
Overexposed?
According to Federal Reserve data, property accounted for roughly a quarter of all US asset markets last year, with a combined value of over $80 trillion for commercial and residential sectors. Could adding more exposure to retirement accounts hurt diversification?
“It already has,” says Cabuto. “Most Americans don’t realize how much real estate they already hold, simply through homeownership. Thanks to recent appreciation, the primary residence often makes up the bulk of their net worth.”
Although typically a safe-haven asset, reckless investment in property can still prove disastrous. The global financial crisis of 2008, for example, was triggered by a subprime mortgage collapse. Could pumping retirement accounts with property fuel another bubble?
“The difference this time is that 401(k) access to real estate isn’t about banks looking the other way and strippers flipping houses like in the movie The Big Short,” says Brennan Decima of Decima Wealth.
“These are professionally managed property investments that have to adhere to ERISA fiduciary regulations.”
Nonetheless, Brennan foresees that a sudden capital influx could pump prices in the short term.
“I don’t think the risk is another subprime meltdown; it’s that investors could end up significantly overexposed to one asset class without realizing it,” he adds.
Buyer Beware
The dual challenges of fees and illiquidity should be considered before jumping into this new opportunity.
Ryan Nelson, Founder of Alchemy Wealth Management, reminds investors that real estate investments often carry higher fees than low-cost mutual funds or ETFs.
“Even a 1% difference in fees can significantly impact long-term growth,” Nelson says.
Unlike stocks, real estate is difficult to cash out of quickly. This can be a drawback, especially if the 401(k) holder already owns their own home.
“Real estate is inherently illiquid, so it should be treated as a long-term allocation. It’s not the portion of your portfolio to tap for short-term needs,” says Nelson.
Bob Wolfe, Founder of HealthyFP, reminds investors not to overlook who is at the helm of any given property portfolio.
“Both plan sponsors and individuals should look closely at the manager’s track record, strategy, and fee structure, and weigh those against their own goals, risk tolerance, and time horizon,” he says. “A qualified advisor can help assess fit before allocating.”
As real estate enters the 401(k) arena, the potential for broader wealth access grows, but so do the risks. So-called ‘democratized investing’ calls for greater caution. Investors should weigh fees, liquidity, and exposure prudently, and consider finding a financial advisor knowledgeable in real estate investing. Adding property returns to one’s post-work income stream is best done in alignment with sound financial planning principles.
