Your 401(k) Can Now Include Alternative Assets, But Should It? A Financial Adviser Weighs In

When President Donald Trump signed an executive order aimed at opening a new wave of investment options for 401(k) account holders, he gave retirement savers an opportunity to potentially boost the value of those accounts.

At least, they might have such opportunities if the third-party administrators for their workplace 401(k) plans elect to add these alternatives to the mutual funds and exchange-traded funds (ETFs) that make up most accounts.

It would be advantageous for plan participants if they do.

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The alternative investments that fall under the president's order include real estate and cryptocurrencies, as well as private-market assets, such as equity and credit in private firms that aren't publicly traded.

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Many participants in 401(k), 403(b) or 457 accounts are intrigued by the idea. For example, according to a survey by Schroders, an asset management firm, 45% of those surveyed say they would invest in private equity and private debt if their plan offered those as options.

Most of the people surveyed don't have high hopes that this will happen, though. Just 30% say they expect their plans to offer these alternatives in the next five years.

That would be disappointing.

Limited options

A 401(k) is one of the most common ways people save for retirement, with about 70% of private-sector employees in the United States having access to such plans.

But one drawback of the plans is the limited investment options many of them give participants. In many cases, those options lean heavily on target-date mutual funds that are tied to the year the employee anticipates retiring.

The idea is that investments within the fund will adjust automatically as the years pass, starting with an aggressive investment mix and becoming more conservative as the target date nears and risk needs to be reduced.

Theoretically, that sounds good. But many people contributing to those accounts could earn greater returns if they had a wider range of investment options — and if they had someone who could offer sound advice on how to get the most out of their accounts.

In too many cases, people with workplace 401(k) accounts act as their own advisers. They're given a list of funds to choose from and make a quick decision without having a good handle on whether it's the best decision.

They shouldn't be faulted. There's no reason to expect that the average person, without any training, will be adept at choosing investments, especially when the goal is to invest for the long term.

Sadly, in too many instances, savers aren't optimizing their portfolios over time and don't realize they could have accumulated much more money than they have.

The rise of cryptocurrency

Now, cryptocurrencies and other investment alternatives could give 401(k) participants the chance to do better — if they're given the opportunity to use them.

In a way, it might not be surprising if some people are hesitant to test the waters with alternatives, preferring to stick with the way things are.

But the way things are hasn't always worked as well as it should have for many people trying to plan a stable and sound retirement.

As fiduciaries, those of us at my firm would not have offered cryptocurrency as an investment option as recently as five years ago. But things change, and the cryptocurrency market has become mainstream. Even so, there are restrictions on how we do it.

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Generally, we prefer to limit cryptocurrency to 5% of a client's portfolio, although clients can request and sign off on increasing the amount up to 10%.

Clients aren't buying actual digital coins. The investment is in crypto ETFs, which allow investors to participate in the cryptocurrency market without directly owning the coins. Instead, they buy and sell ETF shares on the traditional stock exchanges.

Maximizing returns

Many people who feel they're in good shape with their 401(k) contributions and growth aren't in good shape at all, or at least not to the extent they could be. They aren't maximizing their returns. This is one reason so many Americans worry about running out of money in retirement.

If you participate in a 401(k) or similar plan at work, look into whether your plan will offer these alternative investments.

Should the answer be no, there's another option you can consider about which many people aren't aware. Even if you're still working and contributing to a 401(k), you can roll over money from your 401(k) into an IRA and get help managing your investments through a financial professional.

This option is especially advantageous as you near retirement, because you want to make sure you're using the right investment strategies to optimize your portfolio and increase the amount of money you will retire with.

A financial professional can help you understand and implement those strategies.

Your goal is to be able to enjoy the retirement you've always dreamed about, rather than fret about whether your money will last.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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