Adding private assets to a 401(k): What experts are saying

00:00 Speaker A

Well, President Trump has opened the door for crypto and private assets to be included in your 401k. But is that really a good idea? Yahoo Finance senior columnist Kerry Hannon is here to weigh in. So, Kerry, let’s start big picture here. What should retirement savers be thinking about when it comes to adding some of these alternative assets, like crypto or private equity into their 401k?

00:38 Kerry Hannon

Yeah, Ally. I mean, it’s it’s a bit exciting to have something new to to look at that might give you kind of juice up your returns, um, which is a possibility with there. I think Larry Fink mentioned, uh, over a 40-year period, they could see a 15% jump in your returns. And that’s kind of appealing. But that’s the point, 40 years, okay? This is the kind of investment that the the experts I spoke to have said that it really is for somebody that has a long-term horizon because of this. Number one, they are they tend to be very illiquid. You can’t just cash out of these kinds of investments. They are often, they come with high fees. There are layers of fees in them. And there’s very little transparency. It’s very hard to open up the cover and see what exactly is invested in there. So, for the average investor, it’s a little bit daunting because you don’t really know what you’re investing in. So, this is going to be a big challenge for someone, uh, a 401k plan administrator in order to meet a very big criteria, which is called fiduciary responsibility. This is something they have to do before before they put these into your retirement plan. And that means that they are saying that this is in your best interest and it’s above their own interest. So, it’s something that you need to be aware of, and they’re going to have to really jump that hurdle in order to prove that. In fact, these are very good for people because, technically, they’ve been for very high worth, uh, people and there they hold them for long periods of time. And so, they’re aware of the risk involved. Most people, and I’ll wrap it up here, Ally, most people are in target date funds, right? They don’t even know. Those are plain vanilla investments. Most retirement, uh, investors are in those funds. They have no idea what is in their target date fund. So, there you have it.

03:28 Speaker A

Yeah, a daunting task indeed. Now, Kerry, back in April, the CEO of BlackRock floated a new approach, 50 30 20 portfolio. 50% stocks, 30% bonds, and 20% in private assets. So, that’s a big shift from that classic 60 40 split we’ve heard about for decades. What do savers need to know about that?

04:03 Kerry Hannon

Well, I think it’s an interesting idea. There’s absolutely, uh, a lot of positive thinking behind that because things are changing quickly. The markets are changing. These are new ways to diversify what we have invested in to sort of when the market gets shaky and jumpy, you have a little more spread out your risk to a certain degree. But yet, I say these are a bit more risky, but they may have more upside over time. So, I think that that it’s something that we may see more of. That 60 40 portfolio has held pretty strong for a long time. But for those who want to take a little more risk, have a little longer time horizon, it’s it could be an interesting concept.

05:00 Speaker A

And given everything here, Kerry, ultimately, what are experts saying about these plans to incorporate alternatives into retirement accounts? Are they welcoming that diversification, or maybe raising some red flags about the risks?

05:20 Kerry Hannon

Yeah, Ally, they are raising red flags. I’m telling you, that’s what I heard a lot of. But they, I will say this, for the one caveat is, I heard again and again, if somebody has a long-term horizon, they don’t need the money in the next 10 years or something, if they, in fact, will take the time to get educated about what that is specifically that they are investing in. And you should invest in what you know. That is the smartest thing to do. And it’s maybe worth considering, but to start with no more than 5 to 10% of your retirement portfolio because you want to start with baby steps. But really be, you know, do that that challenge to yourself. Do you know what you’re getting into? Are you okay with that risk?