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By Utkarsh Shetti, Suzanne McGee, Arasu Kannagi Basil and Isla Binnie

March 30 (Reuters) - The Trump administration on Monday issued long-awaited proposed rules to open up retirement plans to alternative assets, paving the way for private equity and cryptocurrencies to be added to 401(k) accounts.

The measure, announced by the U.S. Department of Labor, is intended to ease longstanding barriers to incorporating these less liquid and less transparent assets into American retirement plans. It follows an executive order from President Donald Trump last summer and could clear the way for alternative asset management firms to tap a large new source of capital.

Industry groups have argued that private market investments can enhance long-term returns and diversification for retirement savers, while skeptics warn that higher fees, complexity and limited liquidity could pose risks for retail investors.

Some private market funds that are already available to wealthier individual investors have shown signs of strain in recent months. Private credit funds known as business development companies have seen a wave of withdrawals.

'MINDFUL OF PROTECTING RETIREMENT ASSETS': BESSENT

Treasury Secretary Scott Bessent said the proposed rule was "an initial step" and aimed to be "mindful of the importance of protecting retirement assets."

The guidance lays out how plan trustees, who have a legal fiduciary duty to act in the best interest of members, can incorporate these assets.

They would have to "objectively, thoroughly, and analytically consider, and make determinations on factors including performance, fees, liquidity, valuation, performance benchmarks, and complexity," the DOL said.

Trustees who abide by them will be granted safe harbor that protects them from lawsuits, it added.

A Labor Department official said the rule was not telling providers how to invest.

"We're giving them the toolkit so that they can follow an analytical, thorough and objective process," the official said.

The rule "would have been the same regardless of whether stocks are up or stocks are down, PE (private equity) is up or PE is down, private credit is up or private credit is down," the official added, speaking on condition of anonymity.

INDUSTRY APPLAUDS

Alternative asset managers such as Blackstone BX.N, KKR KKR.N, and Apollo Global Management APO.N could benefit from the chance to draw on the new pool of capital. Their shares gained following the announcement.

The world's largest asset manager, BlackRock BLK.N, which counts more than half its $14 trillion in assets under management as linked to retirement, applauded the move.

Martin Small, BlackRock's chief financial officer, said the proposal was "an important and welcome step in advancing the President's executive order to modernize retirement plans for tens of millions of Americans."

The Department of Labor will now open a 60-day comment period for the rule. It will then decide whether to finalize it.

"Americans' ability to participate more fully in innovation and economic growth through well-diversified long-term investments is a vitally important priority for effective retirement planning," said Paul Atkins, chair of the U.S. Securities and Exchange Commission.

Even if the rule is adopted, the migration of alternative assets into everyday retirement plans is unlikely to be immediate, said Erin Cho, a partner at law firm Mayer Brown.

"This will not open the floodgates for private equity, private credit or crypto funds to move into the retirement space," Cho said. "It only provides a process that fiduciaries can adopt if they are considering adding these."

Trade groups, including the Managed Fund Association, also supported the move.

"We look forward to continuing to work with the DOL on a final rule that supports innovation and maintains the robust investor protections Americans currently benefit from," the Investment Company Institute said in a statement.