Alternative assets in your 401(k): Here are the pros & cons

00:00 Speaker A

An executive order signed by President Trump last week would allow 401k plans to offer alternative assets, including private equity, real estate, crypto and infrastructure. What would that look like in a retirement account and what are the benefits and risks? Let’s bring in Lawrence Sprung, Mitlin Financial founder and author of Financial Planning Made Personal for this week’s FA Corner, brought to you by Capital Group. Lawrence, it’s good to see you.

00:27 Lawrence Sprung

Good to see you.

00:29 Speaker A

So this would be a big change in 401Ks to have these assets in them. What is it important to keep in mind if investors are considering whether they should put these in their 401Ks?

00:45 Lawrence Sprung

I think the most important things for them to consider are how old are they? What’s their risk profile? What’s their time horizon? And do these instruments add value to their overall allocation or add too much risk? And then make the decision how they’re going to allocate those funds to those areas.

01:05 Speaker A

Okay, so let’s talk about, let’s take private equity for as an example here. What are some of the pros and cons of something like that?

01:18 Lawrence Sprung

So I think it’s going to be a huge win for the product manufacturers because now they have this whole new opportunity of client base, right? So it’s going to be huge win for them. As far as clients go, they have to be concerned and look at, well, is this really adding alpha, increased returns to my portfolio? Am I okay with the potential illiquidity because I may not be able to buy and sell these as actively as my other investments in my 401k? And what are the costs and do those costs offset the benefits that I’m getting? So there are things to look at overall that I think are a little bit more difficult than just looking at traditional stocks and bonds.

02:17 Speaker A

And we should mention as well, this even though the executive order was just signed, it’s not happening immediately, right?

02:27 Lawrence Sprung

Correct. Yeah, it’s going to probably be months before the Department of Labor starts enacting this and, you know, there is some uncertainty whether it actually goes through. I’m pretty certain it will ultimately end up going through. It’s not a matter of if, it’ll just be a matter of when and how long that is.

02:51 Speaker A

And Lawrence, I’m curious whether, I mean, your investors, people that you’re advising are probably already in some of these instruments, right? Has there been a big increase in interest in things like crypto from your clients, things like private assets?

03:09 Lawrence Sprung

We are definitely getting more inquiries over the last, let’s say, two years than we ever had in the last 15, right? And I think it’s primarily because everybody’s hearing about, everybody’s hearing about the boon in some of those areas. So there are additional questions and then it’s a matter of working with them to have them understand what the pros and cons are, and if it makes sense for them in their own individual situations.

03:38 Speaker A

And are there things that people need to think about about holding an asset, whatever it is, be it equities or anything else, outside of 401k versus inside of a 401k?

03:51 Lawrence Sprung

Sure. There are inherent benefits to both depending on what your goals are with this money, right? The benefit to having it in the 401k, if you have it in the traditional side, is that money’s going in, it’s growing tax deferred, you’ll pay taxes when you withdraw it. If you’re doing it in the Roth 401k component, then you’re going to have a tax-free growth of that asset in perpetuity and you won’t have to pay any taxes. Whereas outside the 401k, in your individual name, it’s going to be either a long or a short-term capital gain at some point. There are benefits to holding things long term in terms of not paying as much in taxes as short term, but you will have to pay taxes. So if there are assets that are more risky that you may not need long term, you may benefit from putting it in the traditional or that Roth 401k component because you’ll receive some significant tax benefits.

04:57 Speaker A

Now, switching gears, there’s something else I wanted to ask you about because during the commercial break you told me you’re getting a lot of questions about it. And this is something else that’s a policy change from this administration, and it’s the so-called Trump child accounts, right? The seeding of a bank account with $1,000 when a child is born. What’s going on with those? Are they happening?

05:22 Lawrence Sprung

So it was passed in the one big beautiful bill. And as of January 1, you are able to start doing those and having January 1 of this 2025 it was able to be seated. But the issue is none of the custodians, none of the investment firms at this point that I’m aware of were prepared for it or are prepared for it. So what I’m hearing is sometime in 2026, hopefully early 2026, these accounts will be available and people will get them seated back to January 1, 2025, and then they’ll be able to start contributing. But we’ve gotten calls about it, people are anxious to set them up and get them going, but nobody’s really prepared to get these moving in the right direction at this point.

06:17 Speaker A

And just real quick, if you’re putting in $1,000 when your kid is born, you want to be pretty aggressive with the investments initially, I would imagine.

06:26 Lawrence Sprung

I would, I would. I mean, you have at least an 18-year runway, chances are that there’s a lot of runway there that you can withstand that volatility and benefit from that compound growth over that period of time.

06:39 Speaker A

Right. Lawrence, good to see you. Thanks for coming in. We appreciate it.

06:43 Lawrence Sprung

Thank you.