Proposed Trump Account rules leave a short list of large-cap index funds

The IRS proposed investment rules for Trump Accounts landed Aug. 20, and the document is the product spec for the newest sleeve in the advisor toolbox, running through the statutory guardrails and then tightening them while the 60-day comment period decides which funds can actually sit in a Section 530A account.

At the base, the proposal keeps the existing constraints: Trump Account money must be invested in a mutual fund or ETF that tracks an equity index made up 'primarily' of U.S. equities, and the fund's fees cannot exceed 0.1%. The IRS is holding its earlier line that 'primarily' means at least 90% American issuers, even as industry commenters have been pressing the agency to lower that threshold so foreign equity can diversify the portfolio; the proposal leaves the door open, saying a final rule 'could provide a safe harbor with a different percentage.' That is an invitation to keep arguing the point.

The bigger break from practice is the debt-securities ban. The proposal excludes any debt securities or instruments — bonds, in effect — and the consequence, which the proposal does not spell out, is that nearly all target-date funds would become ineligible; funds of funds are also out unless the fund tracks a single index and clears every other requirement, while securities lending is expressly permitted.

On fees, the IRS has settled the argument over what counts against the 0.1% cap: all amounts a fund charges its holders directly count, regardless of how they are computed, when they are imposed, or what the marketing documents call them. For advisors, that means a fund that looks cheap after revenue sharing can still fail if its named expenses exceed the cap.

ESG funds are ineligible, and the IRS's reasoning matters because the statute forbids industry- or sector-specific funds; the agency acknowledges ESG funds are not exactly sector funds but says their exclusion of companies makes them similar enough. An advisor who recommends an ESG fund is outside the statute, and the 60-day comment period is the venue to contest the domestic threshold, while the fee cap is the constraint that binds hardest.

Finally, the proposal requires trustees to designate a default eligible investment for each account and give participants the option to select another, but only during the growth period, before the year the beneficiary turns 18. The menu that results, after the 90% test, the bond ban, and the fee cap have all acted on it, is a short list of plain-vanilla large-cap index funds. That is likely the point of the exercise, and it is the detail to put in front of a client before the account is opened.