A Century Leap in the Investment Strategy of the U.S. 401(k) Pension Plan

Author: Chen Mo cmDeFi

On August 7, 2025, U.S. President Donald Trump signed an executive order allowing 401(k) retirement savings plans to invest in a more diversified range of assets, including private equity, real estate, and the newly introduced crypto assets.

This policy is straightforward to interpret:

• Provides "national-level" endorsement for the crypto market, releasing signals that promote the maturation of the crypto market.
• Expands pension diversification in investments and returns, but introduces higher volatility and risk.

In the crypto field, this is already enough to be recorded in history.

Looking back at the development of 401(k), a key turning point was the pension reform during the Great Depression that allowed investments in stocks. Despite differing historical and economic contexts, this change shares many similarities with the current trend of introducing crypto assets.

1/6 · The Pension System Before the Great Depression

From the early 20th century to the 1920s, pensions in the United States were primarily based on defined benefit plans, where employers promised to provide employees with stable monthly pensions after retirement. This model originated from the industrialization process in the late 19th century, aimed at attracting and retaining labor.

During this phase, pension fund investment strategies were highly conservative. The prevailing view at the time was that pensions should prioritize safety over high returns, restricted by "Legal List" regulations, primarily limited to low-risk assets such as government bonds, high-quality corporate bonds, and municipal bonds.

This conservative strategy worked well during economic booms but also limited potential returns.

2/6 · The Impact of the Great Depression and the Pension Crisis

The stock market crash on Wall Street in October 1929 marked the beginning of the Great Depression, with the Dow Jones Industrial Average dropping nearly 90% from its peak, triggering a global economic collapse. Unemployment soared to 25%, and countless businesses went bankrupt.

Although pension funds invested very little in stocks at the time, the crisis still impacted them through indirect channels. Many employer companies went bankrupt and could not fulfill pension commitments, leading to interruptions or reductions in pension payments.

This raised public doubts about the ability of employers and the government to manage pensions, prompting federal intervention. In 1935, the Social Security Act was enacted, establishing a national pension system, but private and public pensions remained locally dominated.

Regulators emphasized that pensions should avoid "gambling" assets like stocks.

……

The turning point began: the slow economic recovery after the crisis, coupled with declining bond yields (partly due to federal tax expansion), sowed the seeds for subsequent changes. At this time, the inadequacy of yields gradually became apparent, making it difficult to cover promised returns.

3/6 · Investment Shift and Controversy After the Great Depression

After the Great Depression, especially during and after World War II (1940s-1950s), pension investment strategies began to slowly evolve from conservative bonds to include equity assets such as stocks. This transition was not smooth and was accompanied by intense controversy.

The post-war economic recovery saw a stagnation in the municipal bond market, with yields dropping to a low of 1.2%, failing to meet the guaranteed returns of pensions. Public pensions faced "deficit payment" pressures, increasing the burden on taxpayers.

At the same time, private trust funds began to adopt the "Prudent Man Rule," which originated from 19th-century trust law but was reinterpreted in the 1940s to allow for diversified investments in pursuit of higher returns as long as the overall approach was "prudent." This rule initially applied to private trusts but gradually began to influence public pensions.

In 1950, New York State was the first to partially adopt the Prudent Man Rule, allowing pensions to invest up to 35% in equity assets (such as stocks). This marked a shift from the "Legal List" to flexible investments. Other states followed suit, with North Carolina authorizing investments in corporate bonds in 1957 and allowing a 10% stock allocation in 1961, increasing to 15% by 1964.

This change sparked significant controversy, with opponents (mainly actuaries and unions) arguing that stock investments would repeat the mistakes of the 1929 crash, putting retirement funds at risk of market volatility. Media and politicians labeled it as "gambling with workers' hard-earned money," fearing pension collapse during economic downturns.

To mitigate the controversy, investment ratios were strictly limited (initially no more than 10-20%), prioritizing investments in "blue-chip stocks." For a period, benefiting from the post-war bull market, the controversy gradually faded, proving its return potential.

4/6 · Subsequent Developments and Institutionalization

By 1960, non-government securities accounted for over 40% of public pensions. The holding rate of New York City municipal bonds dropped from 32.3% in 1955 to 1.7% in 1966. This transition reduced the taxpayer burden but also made pensions more reliant on the market.

The Employee Retirement Income Security Act (ERISA) was enacted in 1974, applying the prudent investor standard to public pensions. Despite initial controversies, stock investments were eventually accepted, but some issues were exposed, such as significant pension losses during the 2008 crisis, reigniting similar debates.

5/6 · Signal Release

The current introduction of crypto assets into 401(k) plans is highly similar to the previous controversies surrounding the introduction of stock investments, both involving a leap from conservative investments to high-risk assets. Clearly, the current maturity of crypto assets is lower and their volatility higher, which can be seen as a more radical pension reform, releasing some signals from here.

The promotion, regulation, and education of crypto assets will advance to assist people's acceptance and risk awareness of such emerging assets.

From a market perspective, the inclusion of stocks in pension plans benefited from the long bull market in U.S. stocks, and crypto assets must also navigate a stable upward market to replicate this path. Meanwhile, since 401(k) funds are essentially locked in,

Pension purchases of crypto assets are akin to "hoarding coins," representing another form of "strategic reserve of crypto assets."

Regardless of the perspective taken, this is a significant positive for Crypto.

The following is supplementary information; professionals may skip it.

6/6 · Appendix - The Meaning and Specific Operation Mechanism of 401(k)

A 401(k) is an employer-sponsored retirement savings plan under Section 401(k) of the U.S. Internal Revenue Code, first introduced in 1978. It allows employees to contribute to individual retirement accounts through pre-tax wages (or after-tax wages, depending on the specific plan) for long-term savings and investment.

A 401(k) is a "defined contribution plan," differing from traditional "defined benefit plans," with the core being that both employees and employers contribute, and investment gains or losses are borne by the employees.

6.1 Contributions

Employees can deduct a certain percentage from each paycheck as a 401(k) contribution, deposited into their individual accounts. Employers provide "matching contributions," which add funds based on a certain percentage of employee contributions, with the matching amount depending on employer policy and is not mandatory.

6.2 Investment

A 401(k) is not a single fund but a personal account controlled by employees, with funds invested in a "menu" of options preset by the employer. Common options include: S&P 500 index funds, bond funds, mixed allocation funds, etc. The 2025 executive order allows the inclusion of private equity, real estate, and crypto assets.

Employees must choose an investment portfolio from the menu or accept a default option. Employers only provide options and are not responsible for specific investments.

• Ownership of Returns: Investment gains belong entirely to the employee, with no need to share with the employer or others.
• Risk Bearing: If the market declines, losses are borne by the employee, with no safety net.

Click to learn about job openings at ChainCatcher

Recommended reading:

Dialogue with Oppenheimer Executive Director: Coinbase Q2 trading revenue fell short of expectations, which businesses will become new growth points?

Dialogue with TD Cowen Research Director: In-depth analysis of Strategy Q2 financial report, what are the key factors behind the 10 billion net revenue?