Trump Account rules: passive funds, 0.1% cap on fees

Trump Accounts now have a proposed investment menu. The Treasury Department and IRS have floated regulations that would limit the accounts — tax-deferred savings vehicles created for American children under the Working Families Tax Cuts law — to index-tracking mutual funds and ETFs, with leverage avoided and combined annual fees capped at 0.1% of the fund balance. InvestmentNews reports the proposal responds to public feedback from the IRS's December request for comment.

IRS Chief Executive Officer Frank J. Bisignano, who took on wider adoption of the accounts after their July 4 launch, framed the rules as a clarity exercise. "These proposed regulations will provide clarity for trustees and beneficiaries of Trump Accounts, thus encouraging eligible participants to invest in low-fee mutual funds and ETFs that will grow on a tax-deferred basis potentially over their entire lives," he said, adding that the accounts let children start investing now and build compound earnings for college, retirement and other needs.

The phrase worth pausing on is "entire lives." The IRS defines the growth period as the stretch from account opening to Dec. 31 of the year the beneficiary turns 17. That is the compounding window, but the account runs beyond it. The proposed rules set the rails for decades of growth, which makes the fund-selection question for advisors bigger than a compliance check.

Now the part that does the work for RIAs: the fee ceiling. Ten basis points shrinks the eligible shelf to the cheapest share classes and a handful of ultra-low-cost ETFs. Custodians will construct eligible lists against that limit, and the advisor who gets the first call will be the one explaining why a favorite S&P 500 fund is absent. A fund can be well-run and still fail the fee test.

The proposal also draws a line against active management. A fund that lets a manager adjust index exposure to beat or trail a benchmark is disqualified. Ordinary index-replication decisions — which components to hold, when to trade — remain fine. The definition of ETF widens to include ETF share classes of mutual funds, after a stakeholder pointed out they function like conventional ETFs. Securities lending stays permitted if the fund retains full economic exposure, a carve-out added after commenters flagged how common lending is among index products.

None of this is final. Proposed rules are drafts, and Treasury could adjust the fee cap or the leverage language before issuing a final rule. But the shape matches what a decade of 401(k) evolution produced: passive, cheap, index-driven. A government-subsidized account priced at 10 basis points raises the standard of comparison for every other account a client holds. The political branding may dominate the headlines; the price ceiling is the durable feature.

For the principal deciding what this means for their firm, the practical answer is simple. The first question clients ask about a new account is what it can own. The proposal gives a short answer: index funds and ETFs that cost next to nothing. Build the offering around two or three funds, near-zero cost, and a decades-long growth story — that sets the expectation. Everyone else will spend the first year explaining why the funds they prefer don't qualify.