New Executive Order Expands 401(k) Investment Opportunities

On August 11, 2025, President Trump signed an executive order directly impacting how 401(k) plans may invest their assets. The executive order is set to broaden the scope of retirement investing by allowing 401(k) and other defined contribution plans to include alternative assets such as private equity. This policy shift could open the door to a wider range of investment strategies within the retirement space, offering plan participants access to markets that were previously off-limits and potentially enhancing long-term growth opportunities.

While much of the attention surrounding retirement plan reforms centers on expanded access and investment opportunity, any legal shift — particularly one involving complex assets like private equity — demands heightened scrutiny of fiduciary and tax implications. One of the less scrutinized potential impacts? Unrelated business taxable income (UBTI).

Understanding the Background of UBTI

In the years leading up to 1950, Congress became concerned that tax-exempt organizations were leveraging their exemption to expand into commercial markets, acquiring businesses and reinvesting untaxed income—an advantage not available to taxable companies, which had to rely on post-tax earnings for growth. To address this, the Revenue Act of 1950 introduced a foundational legal framework for taxing income generated by tax-exempt organizations from activities unrelated to their exempt purposes. The UBTI provisions, originally enacted to address concerns over unfair competition, were later codified in the Internal Revenue Code of 1986 under Sections 511 through 514.

UBTI rules also apply to tax-exempt retirement trusts defined under IRC Section 401(a), which includes 401(k) plans. 401(k) plans are designed to allow tax deferral on traditional investment income, such as passive earnings from stocks, bonds, and mutual funds. However, when a 401(k) plan invests in ventures that produce income from active business operations or from debt-financed property, that income is considered outside the plan’s intended purpose. As a result, it becomes subject to taxation under rules that apply to unrelated business income. This ensures that tax-exempt entities do not use their status to shelter income from unrelated commercial ventures, thereby preserving the integrity of the tax system.

Retirement Plan Investment in Private Equity

Many private equity funds operate as partnerships or LLCs, which can result in retirement investors like 401(k) plans being treated as partners for tax purposes when they invest in these funds. If the fund earns income from active business operations or uses borrowed money to acquire assets, the portion of that income attributed to the retirement plan may be considered outside the scope of its tax-deferred purpose. In such cases, the plan may be required to report the income and pay taxes, which can reduce the benefits of tax deferral typically associated with retirement savings. Many retirement plans lack the infrastructure to monitor UBTI exposure, handle tax filings, or manage the related administrative tasks. If these obligations are overlooked, the plan may face penalties and interest from both federal and state tax authorities.

In general, the IRS imposes penalties for late filing (5% per month late, up to 25% of tax due, with a minimum penalty for filing more than 60 days late) and late payment (0.5% per month, up to 25% of the unpaid tax). Estimated tax penalties also apply depending on the amount of tax due. There are also penalties that can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud (see IRC Secs. 6662, 6662A, and 6663). Interest is also assessed on taxes not paid by the due date, and on the penalties owed.

In addition to federal compliance, there are more than 30 states that have enacted statutes requiring the reporting of UBTI, either based on income sourced within the state or due to the entity’s residency status. 401(k) accounts have added complexity since they are classified as tax-exempt trusts for IRS purposes, but can be classified as a corporation, a trust or a tax-exempt organization for state purposes. Like the IRS, state tax authorities may impose penalties and interest for late filings and payments, making it essential for taxpayers to stay informed and compliant.

Private equity investments involving foreign entities—such as offshore partnerships or corporations—can additionally trigger international tax reporting requirements. Depending on the investment structure, ownership percentage, and capital contribution, forms like 8865, 926, or 5471 may be required.

Plan sponsors and participants should carefully consider the tax and fiduciary implications of investing in assets that may generate UBTI. This is particularly relevant given the executive order expands 401(k) investment options to include private equity, introducing new complexities and risks.

This executive order could create new opportunities and challenges, both from a tax and compliance perspective. Contact us below if you have questions about how this executive order could impact you.