By Dr. Jim Dahle, WCI FounderJosh Katzowitz, our content director, reads financial pornography. I've been trying to break him of that habit, but instead, he seems more successful in getting me to read it and, worse, write about it. The latest edition comes from an article on CBS News titled “Trump wants your 401(k) to access crypto and private equity. Here's what to know.” The article talks about an executive order President Trump signed on August 12 that makes it easier for your 401(k) and other employer-provided retirement plans to include options allowing employees to invest in cryptoassets and private equity funds. The executive order, titled Democratizing Access to Alternative Assets for 401(k) Investors, says:
“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.”
The order defines alternatives as:
- Direct and indirect private equity and debt
- Private real estate equity and debt
- Digital asset funds
- Commodities
- Infrastructure development projects
- Annuities
What could go wrong, right? Well, the main problem is that the majority of the investments in the assets above should probably be avoided by most Americans, whether or not they are available in their 401(k). Most Americans should be mostly investing in boring old index and index-like stock, bond, and real estate funds. Lots of investments in the categories listed above are investments designed to be sold, not bought.
How will the executive order provide access? It's going to loosen up regulations on fiduciaries that own companies and practices that offer 401(k)s. I'm not necessarily against that. I'm not even necessarily against allowing employees access to alternative investments. I mean, we put the WCI 401(k) in place. Not only does it allow Mega Backdoor Roth contributions, but it basically allows all employees to invest in just about anything they can buy at Fidelity, including the private real estate debt funds Katie and I invest in, within the 401(k). But loosening fiduciary duties might not be the best thing for every company and every employee in the country.
The 3 Questions
Assuming your 401(k) takes advantage of this new executive order and offers more private investments, there are three issues at hand.
- The first is whether you should invest in the asset class at all. Maybe that's where we should spend most of our time, but unfortunately, each of these asset classes under discussion is worthy of not just a single blog post, but a series of blog posts.
- The second question is whether the investment vehicle chosen by the 401(k) investment committee is the right way to invest in this asset class.
- The final question is a question of asset location, i.e., is your 401(k) the right place to put this particular investment as opposed to another account like a Roth IRA or a taxable account, assuming you also have access to those.
Should You Invest?
The fun part about investing is that there are no “called strikes.” You don't have to invest in everything to be successful. Katie and I have chosen to invest in three types of producing assets: stocks, bonds, and real estate. We find them relatively easy to understand, see long-term profitable track records, and find it so simple to manage a portfolio with these assets that we don't need to hire professional help to do it. Of that long list of what is now going to be allowed in 401(k)s, the only one we're already doing is private real estate. We don't invest in cryptoassets, commodities, private equity (well, outside of the businesses we control), or annuities. And I have no idea how to invest in “infrastructure.” We don't have to invest in that stuff (including private real estate), and you don't either. It's perfectly acceptable to just avoid it all completely.
We find speculative assets particularly odious. For us, speculative means the return is completely dependent on getting someone else to pay you more for the asset than you paid for it. It is a non-producing asset. It doesn't produce earnings, interest, or rents. You might even have to pay taxes on it or to insure it and protect it. Examples include empty land, currencies (including cryptocurrencies), precious metals, collectibles, and commodities. That doesn't mean you can't get a good return out of a speculative asset. Just imagine buying Bitcoin in 2011, the first time I warned you about it. If you had held that investment from 2011 until today, you would have made a killing. But the same caution I gave out then, I give again today: limit the amount of your portfolio invested in speculative assets to a single-digit percentage of your portfolio.
A particularly important issue to understand about private investments is that they tend to be illiquid. They're not publicly traded. That means there is no market for them anywhere comparable to the public stock and bond markets. You can't just go to cash tomorrow because you want to or because you're quitting a job and rolling over your 401(k). You might not have the ability to get your money back for months or even years. Now, I'm perfectly fine giving up some of my liquidity so long as I am paid to do so. But if you're not, you'd better avoid private investments in your 401(k). I'm sure a lot of these funds will do what they can to give you some liquidity so they can get access to the $13 trillion in defined contribution assets, but that will surely come with some additional fees to whoever is providing that liquidity. In short, you're giving up at least some of that illiquidity premium.
“Private equity” is the latest hot investing topic. The argument is that you get higher returns and lower volatility than you would with publicly traded investments. A neighbor of mine runs a private equity fund. He does think higher returns are available (although far from automatic), but he readily admits the lower volatility is mostly just hiding the volatility. The wonderful thing about public equity is that we've already figured out the best way to invest in it, and that way is super cheap and super simple. It's called “index funds.”
Basically, investing is free, so long as you invest in publicly traded stocks. It's no surprise then that those trying to make money by selling investments must now go into some other asset class to make it. Voila—private equity! Now, investing is complicated again, and you need a pro to show you the right way to do it. And that pro must be paid. There are no private equity index funds. That doesn't mean you shouldn't invest in them, but you're basically going back to the pre-1975 investing world where you have to spend forever figuring out who to invest with; monitor them carefully; and then pay them most, or all, of the excess return they get for you in the form of fees.
Tread carefully in private investments. Every one of them is unique and must be evaluated on its own merits. It's perfectly OK to ignore all of them.
More information here:
The Emotions Behind Short-Term Trading: The Other 5% of Your Money
Investment Committee Considerations
I serve on two 401(k) investment committees, one for my physician partnership and one for the WCI 401(k). Our primary consideration in those meetings is our fiduciary duty to the other employees. But I'm really not impressed with the abilities of most 401(k) committees to select winning actively managed investments for their plans. They never really figured out how to do it with publicly traded stocks, so I have little faith they'll pull it off with digital assets and private equity.
Just because it's “private equity” and it's in your 401(k) doesn't mean you should buy it. You can't just rely on the investment committee's due diligence. You have to do your own. Maybe you get lucky and you get a really good PE investment in your 401(k), but don't count on it.
One alternative that investment committees have is to let the employees invest in mostly anything they want and have them sign a waiver releasing the committee from being liable for their stupidity. That's pretty much the approach we took at WCI. But we're also running a financial literacy business where most of our employees have advanced degrees and know more about investing than most of those who call themselves financial advisors. We might be a little bit of an exception. But even my physician partnership 401(k) at Schwab offers the “PCRA” option, which is basically just a brokerage window. Don't like the mutual funds the committee chose? Fine, go put it all in Nvidia and Tesla. But don't try to sue the company for your risky decisions.
The Asset Location Decision
Once you've decided to invest in an alternative asset class and found the investment vehicle for it, you're still left with the asset location decision. Is your 401(k) really the place for this asset class and this investment in particular? With crypto, the answer is almost surely not if you have any taxable money anywhere. Crypto may be the most tax-efficient asset class out there. Bitcoin does not pay any dividends, it gets capital gains tax treatment, and you don't even have to worry about a wash sale rule when tax-loss harvesting. You can buy it back 10 seconds later and harvest any loss you get. If I owned any, it would be the first asset class I put in my taxable account, not the last.
Other alternative asset classes may not be as tax-efficient, but private equity real estate is more tax-efficient than most of my asset classes since the income tends to be shielded by depreciation. My point is that your 401(k) may not be the best place for this investment anyway. If all of your investment money is in tax-deferred accounts and you want to invest in alternatives, this executive order might matter more to you than it does to me. But that's not the case for most white coat investors.
More information here:
A Moderate-Income Physician’s Approach to Alternative Investments
Should Doctors Be Angel Investing?
The Bottom Line
Don't expect to see any change in your 401(k) for a year or two. It will take time for the SEC, investing companies, and your 401(k) investment committee to act on it. Even if you do see a change, you can probably ignore it. If you want to invest in alternatives, tread carefully and limit them to a reasonable percentage of your portfolio. A portfolio composed entirely of boring publicly traded investments is completely reasonable and, if funded adequately, it should allow you to reach all of your financial goals.
What do you think? Does your 401(k) offer any alternative investments? Would you use them even if it did? Why or why not? If you're investing in private equity, how are you doing so?
That Trump wants people to invest more in crypto has zero to do with the fact that he and his family are now making millions in the crypto business.
Right. And the grift goes on.
You nailed it!
These changes are all about making it possible for con artists to steal more money from unsophisticated investors by giving them access to an investment space that was (until now) closed to them.
How could we possibly trust people to decide on the right investments using their own brains? Oh the horror..
I only look at financial porn for the pictures.
Omg that made me laugh! 🤣
Great breakdown as always Jim. I like how you point out that just because something can be added to a 401(k) like crypto or private equity doesn’t mean most people should actually touch it.
I just saw a Barron’s piece saying Vanguard is teaming up with Wellington to launch three actively managed equity ETFs… Dividend Growth, U.S. Growth, and U.S. Value… with expense ratios around 0.3 to 0.4 percent.
What do you think of those? Is Vanguard doing active ETFs a safer move than what you’re talking about here with 401(k)s, or is it the same kind of “dangerous moves” just in a different wrapper? Do they fit into the boring but effective camp you usually recommend, or are they more of a distraction from simple indexing?
Appreciate how you keep everyone grounded, especially when even Vanguard starts adding more complexity.
I get asked “What do you think of…..” every new investment product that comes out. It’s hard to even have time to formulate an opinion on all of them there are so many. The good news though is that you don’t have to invest in everything to reach your goals. There are no called strikes in investing.
But it sounds like Vanguard/Wellington are simply introducing an ETF share class to their long-standing relatively low cost actively managed mutual funds. If you like the funds but would prefer an ETF format, now you can do that. I didn’t really like the funds much so I’m not particularly interested in the ETF version of them. That doesn’t mean they can’t be part of a reasonable, successful investment plan. There are well over 100 Vanguard funds I don’t invest in.
I’m 44 and have a low-7 figure 401k, about 40% of which is attributable to the ability to invest in some of this historically (Bitcoin ETFs and GBTC before that) through BrokerageLink and PCRA accounts within Fidelity and Schwab 401ks. I recognize things could have gone the other way on this too. On the other hand, I could have also converted each 401K into an IRA after leaving each prior company I worked for and invested there. Instead, I consolidated into a single old 401k that allowed for 95% BrokerageLink to have some of these types of investments while maintaining ERISA coverage.
Congrats on your success and wise use of available retirement plans.
Might have something to do with giving people more control over their investments and financial decisions. But I do appreciate your TDS. Gave us another Trump term.
Yup, more control has its upsides and downsides. Like politics, reasonable people can disagree about how much paternalism is appropriate in a fiduciary.
Cole; read. Learn.
https://www.nytimes.com/2025/08/19/opinion/trump-intrusion-lincoln-roosevelt.html?unlocked_article_code=1.fU8.nwj2.j1vECfkRdky6&smid=nytcore-ios-share&referringSource=articleShare
As others have said, you can get bitcoin ETF though Schwab PCRA brokerage in your 401k plan. As an ERISA 3(38) fiduciary, I would resist any urges by the plan sponsors to add bitcoin in any way, shape or form to the fund menu of the 401k plan. This has nothing to do with what bitcoin is, or with limiting freedom of choice. This is as simple statement to the fact that bitcoin is super volatile, and it can have massive moves in a very short period of time, so it would simply not be appropriate as an investment in a 401k plan for most unsophisticated participants. A 401k plan is a long term saving and investing vehicle, not a day trading platform, so those types of investments should be held in an IRA. Or may be in a Schwab PCRA type brokerage account, though I would still be very careful. Participant lawsuits are a thing, too. I imagine some plans are going to FAFO, as participants losing money with imprudent investments will be 100% suing their plan sponsors. So from this standpoint I don’t think there will be a massive shift towards this asset class in retirement plans, but who knows. Maybe it might happen until the big FAFO moment, and then lawsuits will commence, and then we would be back to square one. We’ll see.
Buddy, Bitcoin is the ultimate long term savings vehicle. Its volality is noise. Its adoption is signal.
Knowledgeable people disagree:
https://www.fooledbyrandomness.com/BTC-QF.pdf
As it turn out, knowledge people disagree with Mr. Taleb (see link). Bottom line–the predictions don’t matter but the outcome does. The market has given bitcoin a CAGR higher than just about any asset outside of NVDA over the last decade, and by market cap it’s now the 5th largest asset on the planet. I’ll listen to the market over the academics any day of the week.
https://finance.yahoo.com/news/blackrock-ceo-makes-huge-bitcoin-143626068.html
Taleb is not just an academic, he is a practical person, first and foremost and a former/current trader who knows his stuff. Sure, it may go up or down, but profiting from this will be nearly impossible consistenly. Buy and hold? Not so fast given crazy volatility and potential for losing everything. Trade the dips? That won’t work either, at least not consistently. This is not a disagreement based on any sort of fundamental principles. It is basically saying that if enough players join, the asset value will go up. Nothing here is contradicting anything Taleb is saying. And as such, a 401k plan asset bitcoin is not!
What Taleb fails to grasp is that currently there is no way for an individual to protect their assets from fiat debasement besides Bitcoin. One may think his stocks and real estate protect against debasement, but one is just a “wealth tax” away from losing real value. Regardless of whether or not these assets are “income producing” or have a yield.
Bitcoin protects one’s wealth from such government measures in a way no other asset can. If a wealth tax passes, good luck trying to get your stocks, gold, or real estate out of the country without paying the tax first. But with the Bitcoin, it’s a piece of cake. This property is not unique to Bitcoin–other cryptos have it too. But bitcoin’s massive size and liquidity relative to other cryptos gives it real first mover advantage that’s yet to have been overcome.
Yes, Bitcoin’s price only goes up so long as its adoption does. Absolutely. But the trick is understanding that its adoption will invariably go up, for the reasons above, and that’s what Taleb fails to grasp.
If you’ve read Taleb’s paper, the government is able to track bitcoin just fine given the need to do it. And even if that wasn’t the case, that’s not a good reason to lose all your money in one shot in a 401k plan. We are talking about bitcoin in 401k plans after all. Anyone else can own bitcoin for whatever reason, but 401k is not the place, can we agree on that?
Whether you love Bitcoin or not, it seems silly to put it in a 401(k) if you have any taxable space at all given its tax efficiency.
Not really when you consider rebalancing. If I buy 1 btc in a 401k and it goes to 500k in 5 years, I could sell 1/2 and rebalance it into s&p with no tax loss.
A “good problem” historically with Bitcoin is that it has appreciated so much compared with all other assets that it starts to take over your whole portfolio if you don’t rebalance somewhat regularly, and that definitely comes at a tax cost . Same reasoning it’s better to have S&P in tax advantaged account as opposed to bond funds, even though the S&P is technically more “tax efficient.”
The possibility of easier rebalancing probably wouldn’t be enough to convince me to put such a tax-efficient asset in my 401(k) instead of something else. But I don’t pay very much in capital gains taxes because we donate so much to charity.
The main problem with Bitcoin as an investment still remains the speculative nature of its future returns. I still have no idea what a Bitcoin will be worth in 5, 10, or 30 years. Could be zero. Could be $4 million. Those who are convinced it’s more likely to be $4 million buy it now. Those who aren’t don’t. But if I actually need to use it for something besides speculating, I’ll just buy it then at whatever the price is.
Yes, they can track bitcoin, but that doesn’t mean they can confiscate it (esp once you’re out of the country).
Nobody is losing their whole 401k in one shot. No one without a deep understanding of Bitcoin would put 100% of their 401k into Bitcoin (more like 1-5% max), and also bitcoin is never going to 0.
However, yes, I agree bitcoin in a 401k would not be my go to in the long term, but not because of risk of failure in the long term. Possibly 401k makes sense to lock in some tax free gains 5-10 year time frame, but long term, it only works as a self-sovereign asset in one’s own cold storage wallet. In the long term, if (when) USD fails (ie USD soft defaults), Bitcoin in 401ks could certainly be seized.
It is very easy to imagine a scenario where people invest all of their money into bitcoin inside a 401k plan. And currently there are plenty who get their investment advice from youtube and twitter who would be willing to do that. In fact, we’ve seen this happen in the late 90s when people put all of their money into the hottest tech funds in their 401k plans, only to subsequently lose as much as 80% of it.
Bitcoin can go to zero. If you read Taleb’s paper, he outlines how this can happen. It is just another asset that can go up and down, nothing special. Even if I told you with 100% certainty that bitcoin is going to go up, profiting from this is impossible because you know neither the timing nor the amount. And subsequently it can go down, and then up, etc. The only people who truly profit are the ones who got in at the ground floor, and those who can convince the rest to pile on while they cash out. Everyone else is going to be holding the bag when another inevitable crash comes.
If one only puts 5% into bitcoin, that’s not going to move the needle, but I see plenty of people have a lot more than that invested. And they have a cult-like belief that they can not lose if they stick around. With this type of group-think, crashes will hurt, badly.
I did read the paper, and his grand argument for why bitcoin will go to zero is because it can go to zero, so it will go to zero. Nonsense. One needs to use his own reasoning abilities sometimes when thinking about these things.
Bitcoin is going up FOREVER against the USD because one is finite and the other is infinite. Everyone who buys and holds retains their spending power. Everyone who gets into a life raft is saved, not just those who “got in first.”
Also, yes, just 5% can move the needle believe it or not. And you don’t need to market time. Just DCA. Just like with any other asset.
https://grok.com/share/c2hhcmQtMw%3D%3D_c415c451-b1b3-4ace-87b7-5765fd590873
I admire your faith. Never is a dangerous word. I wonder how many owners of these coins felt they would never go to zero.
https://www.visualcapitalist.com/cp/ranked-dead-crypto-coins-by-year/
751 of them in 2018 alone.
“But Bitcoin is different” its fans say. Maybe it is. Maybe it isn’t. We’ll know in a few decades and I’m content to watch from the sidelines until then.
Yes, Bitcoin is absolutely different. The shell, glass bead, bronze coin, etc. all have gone to zero against gold, and it’s not an accident. Gold didn’t become what it is just because humanity had a convention and decided to make it money. The market chose it over time due to gold’s inherent properties of durability and scarecity compared with other alternatives. Same for Bitcoin and the other cryptos. Bitcoin stands alone. Anyone who tells you otherwise is trying to sell you something. It’s easy to see when you can open your eyes to it.
I love the insinuation that non-believers just don’t have their eyes open. Or they just haven’t read enough about it. But nobody tells someone who read one article and bought some Bitcoin that they haven’t read enough. I suspect I’ve read more about Bitcoin and understand it better than the vast majority of its owners. I still don’t have a strong enough conviction that it can “only go up” to actually own any significant amount of it.
That’s totally fine of course. Not saying you should own it. Two perfectly reasonable and intelligent individuals can look at the same information and come away with different conclusions. We all have different experiences and biases. That’s what makes a market. But you should (as a financial blogger) decide at what point bitcoin has crossed the Rubicon so that you don’t keep mentally moving the goal posts. If for you that’s when it’s being commonly used for transactions day to day, that’s fine. Just accept it may take a couple of decades until it gets there. In the US anyways.
Are you asking when I will use it as a currency or when I will use it as an investment? I don’t use any currencies as investments currently, so I’d have to start doing that before I started using Bitcoin as an investment. But if everyone else starts using it as the preferred currency, of course I would. As Taleb eloquently argues above, it’s failed as a currency. We were supposed to be using it as a currency at least a decade ago. Remember when we were talking about all the places that were taking Bitcoin and you could buy a pizza with it somewhere? Well, the vast majority of businesses have reversed that position as near as I can tell. The US government regulates it as an investment. So that’s what it is. It’s a speculative investment with possible uses to transfer money and flee the country with wealth and a potential future where it becomes a functional currency.
Taleb is ignorant in calling Bitcoin a failed currency. Before a commodity money can be widely used as a currency, it has to be a widely adopted store of value. Why would you buy bitcoin just to use it for trade? You wouldn’t. If you already have substantial amounts of it saved first, then you would start to spend it slowly. Just common sense.
The US treats it as an investment because that’s what it is, right now. You gotta look decades out when thinking this through, not what is happening today and tomorrow.
Everyone jumped the gun on medium of exchange and thinks bitcoin failed because it didn’t see adoption in that way. They failed to realize it needs to succeed as a store of value before becoming a medium of exchange and unit of account.
One might argue that its volatility makes it a poor store of value as well. Maybe its volatility is decreasing and will continue to decrease, but it’s still pretty volatile right now. Even just in the last 8 months it has been as low as $75K and as high as $120K. That’s not a store of value.
Criticism about Bitcoin’s volatility is also too short-sighted. Its volatility is a function of its market cap. The trend is undeniably down over time (https://bitbo.io/volatility/).
As its superior properties drive adoption and increased market cap, volatility will come down.
But even if it doesn’t, low volatility is not a precondition for a store of value. We’re not taking about tracking CPI inflation, which is a flawed metric to begin with. We’re talking about protecting against currency debasement. Just look at Gold’s volatility month to month during Weimar Germany’s hyperinflation (see link). Would you really argue it was not a store of value just because it was volatile?
https://x.com/DylanLeClair_/status/1396518689177063429?t=LCu4lVfaQK-DUV9Uni37mA&s=19
I guess you’re entitled to use your own definition of store of value. My definition is far lower volatility than what Bitcoin offers.
We’re just thinking in different time horizons. I’m looking down the road 20-40 years and want my work to not have been stolen by the government. I could not care less what bitcoin’s price does in the next 1-5 years. Its volatility is noise.
I think it takes a great deal of “Bitcoin Faith” to believe it will be a good store of value over the next 4 decades. I have no idea what a Bitcoin will be worth when I die. I don’t think anyone else does either.
Lol. You love making it into a religious/faith argument, Jim. It’s just history, facts, and logic. Say you know about the existence of steel, and know about the properties of steel, but bridges have only been made of stone in your lifetime. Does it take a great deal of “steel faith” to believe bridges will be made of steel and not stone in the future?
I don’t trust that new-fangled steel. It looks bendy compared to good old rock.
Maybe Bitcoin is steel. Maybe it isn’t. Time will tell.
Time will indeed tell.
Bitcoin certainly has a dedicated fan base. Whether their vision of the future is correct or not time will tell. My crystal ball is cloudy on the subject.
The answer is “No”. Based on my conversations with employees at the Parks Div. that I retired from at a time that I was sometimes approached by some of these people with questions like “what should I use in my 457 plan ?” (mostly blue collar) who tended to approach investments like they were “playing the horses”.
Really don’t understand the fine nuances between pure gambling and investing in such a way as to minimize the gambling aspect as much as possible. No way to totally remove every trace of the gambling aspect but it can be minimized.
I hope the Voya rep at the Dept. of Human Resources gives them some help (A packaged version of the Vanguard Index 500 fund is on the smorgasbord and I think Wellington might be also)
This is an interesting move, but it definitely raises big questions about risk management for everyday investors. While diversification is important, crypto and private equity inside 401(k)s could expose people to volatility they might not fully understand. Education will be key if this policy moves forward.
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“Not only does it allow Mega Backdoor Roth contributions, but it basically allows all employees to invest in just about anything they can buy at Fidelity, including the private real estate debt funds Katie and I invest in…”
What private real estate debt funds are these? Are they mutual funds?
Mutual funds are publicly traded. More on private real estate debt funds here:
https://www.whitecoatinvestor.com/private-real-estate-lending-funds/
Right, so how are your 401k participants buying them at Fidelity?
Well, it’s only Katie and I but we’re participants too I suppose. We email our 401(k) provider and the provider of the funds and they get it all sorted out. It’s not quite as straightforward as buying VTI for sure.