By J.J. Conway
My brother-in-law, age 37, is a cryptocurrency fanatic while my father, age 87, is a Warren Buffett devotee. My brother-in-law has travelled the world attending conferences discussing the possibilities of cryptocurrencies. My father attended the Berkshire Hathaway May 2009 annual meeting to better understand the aftermath of the financial crisis. My brother-in-law has spent most of his professional life working virtually while my dad went to an office every day. During the holidays, my father dons a coat and tie while my brother-in-law wears a Bitcoin ugly sweater. They are from two different generations, and they represent two different approaches to investing and retirement planning.
The Trump Administration is going with my brother-in-law on this one.
In what are expected to be a package of executive orders and regulatory advisories issued by the President and his Secretary of Labor, the administration has announced plans to allow 401k accounts to invest in new retirement products. The administration announced that it intends to allow employees to make investments in cryptocurrencies, private equity, hedge funds, and precious metals as they save for retirement. This is a seismic shift in U.S. public policy.
How it will turn out, no one really knows.
For those of my father’s generation, the key to successful retirement planning was to always “pay yourself first” - putting money into blue chip stocks and government bonds. His generation believed that when it came to investing, the more boring, the better. My father’s generation used dollar-cost averaging, a disciplined and patient investing approach with the idea that steadiness will lead to financial security. Investing in low-cost index funds and government bonds is typical of this saving style. The idea is that by purchasing shares in the market and government bonds, the investments will do the work themselves – no stock-picking or reading complex financial statements.
In the relatively new world of cryptocurrencies, the “investments” appear to yield incredible sums of tradable wealth rather quickly. Stories of overnight millionaires zooming around Miami on miniyachts abound. Although, to be fair, these stories of great wealth-making are balanced out by stories of fraud and organized crime organizations taking advantage of blockchain technologies to launder money or pull off scams. To the outsider, crypto can seem risky and scary.
Along with crypto, another new frontier is allowing savers to invest in “alternative” investments like private equity and hedge funds. While such investment products have a longer history than cryptocurrencies, they have traditionally been legally restricted to institutional investors and wealthy individuals.
Alternative investments have been associated with higher-than-average management fees and restrictions on withdrawals. The standard management fee charges on private market investments are a 2% sales charge and with a 20% annual charge on all profits (there may be other fees as well) along with restrictions on withdrawals. Investments of this kind can limit the ability to withdraw for as long as ten years.
What is unclear is just how this new selection of retirement investment options will work practically. There are going to be some obvious administrative challenges. For example, how will these new private investments be sold to new investors, and how will they be priced? Most alternative investments are limited partnerships – how will that change? Alternative investments also rely on secondary markets to offload underperforming assets or to quickly extract cash. How will that work? How will cryptocurrencies be priced ten years from now?
There seems to be a looming issue over the appropriateness of the management fees charged and what type of liquidity will be available for savers and retirees. Cryptocurrencies appear to rely upon a purely market valuation (whatever someone is willing to pay is the price) so the management fee structure of both types of investments will have to be created.
In recent years, extensive litigation has been filed against employers for selecting investment options that were high cost. Many successful lawsuits have been brought against benefit plans arguing that the management fees charged on investment accounts were excessive. Similarly, many large institutional investors, like Yale University and the University of California, are trying to exit private markets. They have been forced to offload their private equity and hedge fund investments into the secondary market, reportedly at some discount (or in some cases pairing their most valuable investments with their underperforming ones to attract buyers).
Perhaps realizing that ERISA’s fiduciary duty owed to retirement savers in 401k plans might conflict with offering cryptocurrencies or alternative investments in employee benefit plans, the Trump administration is floating safe harbor rules that might alleviate employer plan sponsors from fiduciary liability for offering such funds. It may be a hard sell to defend the cost and suitability of these investments for the average saver under ERISA’s rules.
Indeed, this is a Brave New World for 401k retirement plans – and it is one my dad’s generation will likely avoid, and one my brother-in-law’s generation appears ready to explore.
————————
John Joseph (J.J.) Conway is an employee benefits and ERISA attorney and litigator and founder of J.J. Conway Law in Royal Oak.
My brother-in-law, age 37, is a cryptocurrency fanatic while my father, age 87, is a Warren Buffett devotee. My brother-in-law has travelled the world attending conferences discussing the possibilities of cryptocurrencies. My father attended the Berkshire Hathaway May 2009 annual meeting to better understand the aftermath of the financial crisis. My brother-in-law has spent most of his professional life working virtually while my dad went to an office every day. During the holidays, my father dons a coat and tie while my brother-in-law wears a Bitcoin ugly sweater. They are from two different generations, and they represent two different approaches to investing and retirement planning.
The Trump Administration is going with my brother-in-law on this one.
In what are expected to be a package of executive orders and regulatory advisories issued by the President and his Secretary of Labor, the administration has announced plans to allow 401k accounts to invest in new retirement products. The administration announced that it intends to allow employees to make investments in cryptocurrencies, private equity, hedge funds, and precious metals as they save for retirement. This is a seismic shift in U.S. public policy.
How it will turn out, no one really knows.
For those of my father’s generation, the key to successful retirement planning was to always “pay yourself first” - putting money into blue chip stocks and government bonds. His generation believed that when it came to investing, the more boring, the better. My father’s generation used dollar-cost averaging, a disciplined and patient investing approach with the idea that steadiness will lead to financial security. Investing in low-cost index funds and government bonds is typical of this saving style. The idea is that by purchasing shares in the market and government bonds, the investments will do the work themselves – no stock-picking or reading complex financial statements.
In the relatively new world of cryptocurrencies, the “investments” appear to yield incredible sums of tradable wealth rather quickly. Stories of overnight millionaires zooming around Miami on miniyachts abound. Although, to be fair, these stories of great wealth-making are balanced out by stories of fraud and organized crime organizations taking advantage of blockchain technologies to launder money or pull off scams. To the outsider, crypto can seem risky and scary.
Along with crypto, another new frontier is allowing savers to invest in “alternative” investments like private equity and hedge funds. While such investment products have a longer history than cryptocurrencies, they have traditionally been legally restricted to institutional investors and wealthy individuals.
Alternative investments have been associated with higher-than-average management fees and restrictions on withdrawals. The standard management fee charges on private market investments are a 2% sales charge and with a 20% annual charge on all profits (there may be other fees as well) along with restrictions on withdrawals. Investments of this kind can limit the ability to withdraw for as long as ten years.
What is unclear is just how this new selection of retirement investment options will work practically. There are going to be some obvious administrative challenges. For example, how will these new private investments be sold to new investors, and how will they be priced? Most alternative investments are limited partnerships – how will that change? Alternative investments also rely on secondary markets to offload underperforming assets or to quickly extract cash. How will that work? How will cryptocurrencies be priced ten years from now?
There seems to be a looming issue over the appropriateness of the management fees charged and what type of liquidity will be available for savers and retirees. Cryptocurrencies appear to rely upon a purely market valuation (whatever someone is willing to pay is the price) so the management fee structure of both types of investments will have to be created.
In recent years, extensive litigation has been filed against employers for selecting investment options that were high cost. Many successful lawsuits have been brought against benefit plans arguing that the management fees charged on investment accounts were excessive. Similarly, many large institutional investors, like Yale University and the University of California, are trying to exit private markets. They have been forced to offload their private equity and hedge fund investments into the secondary market, reportedly at some discount (or in some cases pairing their most valuable investments with their underperforming ones to attract buyers).
Perhaps realizing that ERISA’s fiduciary duty owed to retirement savers in 401k plans might conflict with offering cryptocurrencies or alternative investments in employee benefit plans, the Trump administration is floating safe harbor rules that might alleviate employer plan sponsors from fiduciary liability for offering such funds. It may be a hard sell to defend the cost and suitability of these investments for the average saver under ERISA’s rules.
Indeed, this is a Brave New World for 401k retirement plans – and it is one my dad’s generation will likely avoid, and one my brother-in-law’s generation appears ready to explore.
————————
John Joseph (J.J.) Conway is an employee benefits and ERISA attorney and litigator and founder of J.J. Conway Law in Royal Oak.
