Private Funds and Crypto in Your 401(k)? Approach with Caution

The White House recently issued an executive order aimed at allowing access to alternative investments within retirement accounts. Specifically, private market investments (those not listed on public exchanges) and digital assets like cryptocurrency could be fair game.

This drastically widens the permissible investment options in accounts like 401(k)s, which have  traditionally offered just a handful of mutual funds for investors to choose from. While it may be a while before plan custodians expand their offerings, it’s never too early to survey the benefits and risks, and how you might approach this.

The Good

I’m generally in favor of expanding access – especially when it comes to money – to opportunity that was previously restricted or forbidden. For example, there have been recent efforts to expand the definition of “accredited investor”, and I believe that there is still more work to be done on that front.

When it comes to the 401(k) account and other defined-contribution plans, I have found the investment options to be overly and unnecessarily limiting. When the standard options (sometimes, and certainly not always) force you to choose between a target-date retirement fund, or a build-your-own portfolio of mutual funds carrying high fees, expanding the menu in any way is a win.

When integrated as a small percentage of overall assets, there is an opportunity to capture potentially higher returns.

A Word of Caution

As I consistently say, I try to avoid shiny object syndrome whenever possible, and I advocate for others to do the same. This is not to say that one should not take risk or that because something is new it is unwise to pursue, but rather, to perform some self-study before jumping headfirst.

Sometimes, simple is better, and you never invest in something you don’t understand. Warren Buffett has famously talked about staying within his “circle of competence” when investing. Just as you wouldn’t invest in a company’s stock when you don’t understand the business, you certainly wouldn’t take on an entirely new category (private funds, crypto) without knowing what you’re buying.

Additionally, speculation (as is common with unprofitable tech stocks, for example) is best carried out in a taxable brokerage account and in amounts that won’t wipe you out financially. When it comes to retirement funds, your assets should be protected at all costs.

Here are some other considerations:

• High Fees – private equity and hedge funds typically charge high management and performance fees. Their inclusion in a packaged offering for a 401(k) would certainly pass those fees along to you.
• Volatility – as is evident with crypto, prices can swing dramatically. Consider your attitude toward volatility, and whether it aligns with the inclusion of something like crypto in your retirement account.  
• Complexity and Opacity – because private funds are just that…private, it can be difficult to find relevant financials. There will be an inherent limit to how much due diligence can be performed on private companies and funds.

Final Thoughts

Continue to filter every investment decision through your own thoughtfully constructed set of criteria. It’s hard to beat having a solid plan and an excellent filtering mechanism.