Should You Consider Adding Alternative Assets (Bitcoin, Private Equity) to Your 401(k)?

On August 7th, President Donald Trump signed an executive order: Democratizing Access to Alternative Assets for 401(k) investors. If you currently have a 401(k) plan with your employer, then you’re one of the more than 90 million Americans impacted. According to the new executive order:

“It is the policy of the United States that every American preparing for retirement should have access to funds that include investments in alternative assets when the relevant plan fiduciary determines that such access provides an appropriate opportunity for plan participants and beneficiaries to enhance the net risk-adjusted returns on their retirement assets.”

This section of the executive order captures the gist of what Americans can expect for their 401(k) plans. In other words, it means that Americans can now invest in alternative assets through their 401(k) plans. It brings more investment opportunities to the average investor that were previously only available to the ultra-wealthy. However, before you invest like the rich, it’s essential to understand the risks that come with it.

Alternative Assets to include in your 401(k)

Assets are physical or non-physical things you own that have value. Common assets, such as funds, stocks and bonds, were initially the only options available for investment in a 401(k) plan. However, they are not the only asset classes available on the market. Cryptocurrencies (including Bitcoin), owning businesses (private equity), and precious metals (such as gold and silver) are also considered assets. President Trump’s new executive order just made investing in these alternative assets even easier through your 401(k) plan. Here’s a breakdown of all the alternative assets that are considered qualified investments for your 401(k):

·       Private market investments - e.g., Shark Tank-style business investing

·       Interests in real estate - e.g., investing in real estate development projects

·       Investments in digital assets - e.g., cryptocurrencies, NFTs, meme coins

·       Investments in commodities - e.g., gold, silver, oil, natural gas

·       Interests in projects financing infrastructure development - e.g., private credit projects

·       Lifetime income investment strategies - e.g., income annuities

These asset classes were previously only accessible to accredited, high net worth individuals. The executive order effectively expanded access to wealth-building, allowing you to invest in them as well. Each asset class varies in its risk profile. Fiduciaries, or the individuals managing your 401(k) plan, are required to understand and share information about the various assets including risks with their clients (you) before investing.

What finance experts say about including alternative assets in your 401(k) plan

Before you dive headfirst into the exciting world of alternative assets like Bitcoin and Commodities, here’s what Bill Shelmon, founder of Paycheck to Wealth, had to say about the new announcement when asked whether it’s a smart investment:

There are rewards and risks with every investment. Financial advisers at Paycheck to Wealth help gauge your risk tolerance to see if it’s a good investment for your wealth-building journey.

Advantages of investing in alternative assets

Good news—you don’t have to have money like the super-rich to invest in alternative assets. And even better news is that when you’re invested in the same things, you make money when they make money! You know the saying, “the rich get richer,” and now you can finally be on the rich side of the equation. Here’s why investing in alternative assets can be good for your 401(k) plan:

Better returns

Most 401(k) plans are invested in mutual funds, a low-risk investment that can average 10-12% returns during good years. According to the Rule of 72, at this rate of return it will take approximately six years to double your money. If you opted for an alternative asset like Bitcoin, $1,000 invested in the cryptocurrency in 2010 (15 years ago) would be worth $1.62 billion today! That type of return on investment doesn’t happen every day, but admittedly, it is more likely with higher risk alternative assets than traditional investments.  Remember, this is for illustration only.  Keep in mind that past performance is no guarantee of future results.  As with any investment, the potential to lose money also exists.

Better diversification

Diversifying your investment portfolio is a recommended strategy for reducing risk. One asset with positive returns can outweigh multiple investments with negative returns. Alternative assets provide more different investment opportunities for investors.

More options to match your risk tolerance

Every investor has a different level of risk tolerance. Typically, younger investors can sustain higher-risk investments that have faster growth, compared to retirees who are better served with low-risk investments that generate consistent income and preserve asset values. Investors able to stomach higher risks have an opportunity to see their portfolio increase in value if the alternative assets pay off.

Risks with investing in alternative assets

The biggest controversy about the new Trump executive order is the risk concern. Alternative assets were accessible only to UHNW (ultra-high net worth) investors because they had the investment experience to understand the risks and the resources to take on riskier investments. Now that it’s being made available to more than 25% of Americans, more people may only focus solely on the advantages without considering the risks.

Here’s what you need to know about the risks of investing in alternative assets in your 401(k):

More complex investments

Billionaire investor Warren Buffet says to only invest in what you know (he actually doesn’t own any Bitcoin). Most people spend most of their time at their day jobs instead of researching finance, which can make understanding these alternative investments harder for the average investor. Don’t get caught up in the hype about headlines of investors striking it rich overnight with Bitcoin bets. Their complexities may put your long-term wealth-building strategy at risk.

Higher fees

Fees are often overlooked when making investments. However, they can have a significant impact on the actual return you get on your money. Mutual funds and ETFs are largely passively managed and therefore don’t require high fees. The sophistication of alternative assets, like private equity, can come with higher fees.

Illiquidity

Holding mutual funds and ETFs in your 401(k) makes accessing your money as easy as selling your shares over the open marketplace. Stakes in private equity, real estate projects, and other alternative investments aren’t as liquid or easily sold immediately when money may be needed.

Should you invest your 401(k) into alternative assets?

Alternative assets are now available to include in your 401(k) investments. It’s exciting news for ambitious investors. However, both pros and cons should be considered before investing your hard-earned money in alternative assets.

Explore your options for investing in alternative assets by speaking with an investment advisor. Contact Paycheck to Wealth today for a free no obligation consultation.  Paycheck to Wealth always puts your financial wellbeing first.