Bitcoin in your 401(k)? New Bill Would Boost Alternative Assets in Retirement Plans

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A bipartisan congressional bill would give 401(k) investment managers more leeway in selecting investment vehicles for employee retirement plans.

The Retirement Savings Modernization Act grew out of the Senate Banking Committee under the leadership of Pennsylvania Republican Senator Patrick J. Toomey. Toomey and his co-authors intend to build support for the bill as a critical piece of a year-end financial reform package.

The intent of the bill is to encourage retirement plan administrators to diversify 401(k) holdings to include “alternative” investments such as real estate and private equity. Currently and historically, pension fund managers have been free to diversify holdings beyond the stock market. But, Toomey said in a statement, 401(k) managers have mostly stuck to the market, to avoid potential litigation over risky investment decisions.

But as traditional 401(k) tenures have stagnated, the “high ones” have fared better. A Georgetown University study cited by the bill’s sponsors estimated that modest, conservative diversification into alternatives could boost 401(k) plan performance by 17% annually and reduce losses in a recession.

Toomey’s bill, which amends the Employee Retirement Income Security Act of 1974, “clarifies” the actions 401(k) managers can take to increase future retirees’ returns without running the litigation risk.

The three central points of the bill include:

  • Clarification that “plan fiduciaries may select investment options that include a variety of asset classes, including private equity.” The sponsors note that ERISA does not limit asset classes for 401(k) plans. Rather, managers have simply avoided them. The bill “makes clear that Congress intends to allow investment professionals to determine the appropriate range of asset classes.”
  • Full protection for the ERISA fiduciary standard, with no safe harbor for the fiduciary. Although ERISA’s fiduciary standards have been validated by a US Supreme Court ruling, the bill stipulates that “fiduciaries must still select investments through a prudent process.”
  • Promotion of prudent diversification of retirement savings plans. The bill acknowledges that plan administrators may not want to diversify. But to encourage them to do so, he provides “tools” to make it easier to diversify.

Surveys of plan administrators, particularly those who oversee 401(k) retirement plans, have shown that they are inherently conservative and reluctant to change their holding mix. While the bill tacitly includes digital (bitcoin) investment vehicles in the alternative mix, backers don’t anticipate a rush to add such holdings to a retirement fund portfolio.

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