Every week, Allworth Financial’s Steve Hruby, CFP®, and Bob Sponseller, ChFC®, answer your questions. If you, a friend, or someone in your family has a money issue or problem, feel free to send those questions to yourmoney@enquirer.com.
H.A. from Springfield Township: Eager to start investing my 401(k) in crypto and private assets, but wanted your take first.
Answer: Sounds like you’re a part of the 45% of investors that a Schroders survey recently found would invest their 401(k) in private equity and debt if their plan allowed it. But if you’re a long-time reader of this column, you might be able to guess our answer to this one: Just because you can do something doesn’t mean you should. But first, let’s step back so everyone is on the same page.
Earlier this summer, President Donald Trump signed an executive order that nudges the Department of Labor to reevaluate its guidance around employer retirement plans. Specifically, it opens the door to so-called “alternative assets” being allowed in 401(k) plans (think cryptocurrencies, private equity, hedge funds, real estate, etc.). It’s a big headline, but it doesn’t mean your employer is suddenly going to let you buy Bitcoin in your 401(k) tomorrow.
What the order really does is ask regulators to take another look. And if new guidance does emerge, plan sponsors (i.e., your employer) will still need to decide whether to offer those investments, and most will proceed with extreme caution. Why? Because these assets come with unique risks that could expose employers to liability if workers lose their shirts.
As for the potential benefits of adding these types of non-traditional investments to your 401(k), they can go a long way in offering more diversification and possibly reducing overall risk when blended thoughtfully into a broader portfolio. There’s also the allure of higher return potential; some private investments have historically outperformed traditional markets.
But – and this is a big but – the downsides are worth serious consideration. These types of assets tend to be much more complex than stocks or bonds, and they’re often difficult to evaluate or monitor. Fees are usually higher, too, and sometimes significantly so. You may also encounter liquidity constraints, meaning your money could be locked up for years without access. All of that makes them a tricky fit for many retirement savers.
(A quick note: If these investment options do show up in your 401(k)’s plan in the near future, it’s likely they’ll first be found inside target date funds (TDFs), a type of professionally managed fund that automatically adjusts its mix of investments based on your expected retirement year. TDFs are designed to simplify retirement investing, which makes them a more controlled environment for introducing more complex assets.)
The Allworth Advice is that alternative assets may eventually land in your 401(k) plan’s list of investment options, but they’re not a magic bullet. However, they can make sense for the right investor. But “the right investor” typically has substantial wealth, broad diversification, a long time horizon and an appetite (and capacity) for risk. Even then, it’s typically wise to keep this slice of the pie to 5-10% of a portfolio, at most. If you’re tempted, go in with eyes wide open, know your risk tolerance and think about consulting with a fiduciary financial advisor to determine whether what you’re considering aligns with your overall retirement game plan.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Retirement planning services offered through Allworth Financial a SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Visit allworthfinancial.com or call (513) 469-7500.
