one partner in partnership wants only alternative investments in 401(k)

[AJC]

I have a client that is a partnership sponsoring a 401(k) plan. There are 8 partners with equal ownership and 50 rank and file employees participating under the plan. All partners are surgeons, each has a separate P.A. and all are adopters and signers of the plan. Their plan document allows investment in "qualifying plan assets" only.

One of the partners wants to invest his account exclusively in gold and bitcoin. So, without requiring the plan to ease its investment restriction, is there a way to accomplish this? For example, could this be accomplished if this particular partner's P.A. sponsored its own plan? Or in another manner? 

[C. B. Zeller]

Even if it could, availability of an investment alternative is a benefit, right or feature which can not be discriminatory in favor of HCEs.

[Luke Bailey]

8 hours ago, C. B. Zeller said:

Even if it could, availability of an investment alternative is a benefit, right or feature which can not be discriminatory in favor of HCEs.

AJC, C.B. Zeller is correct, but maybe not providing the complete picture. It would be possible, but as C.B. Zeller implies, the main plan would have to permit similar investments. If the partner who wants to invest in bitcoin and gold would be consent with ETF's that invested in those assets (and there are some), then it might be possible to achieve just by adding a brokerage window to the existing plan.

[MICHAEL HATLEE]

Have you considered the addition of a Self-Directed Brokerage option. This option would still be subject to benefit, rights and feature but it would allow any "investment expert" to direct their funds to a brokerage account (under the plan) and invest as they pleased.

[BG5150]

Remember the bonding requirements for non-qualifying assets.

[Luke Bailey]

9 hours ago, BG5150 said:

Remember the bonding requirements for non-qualifying assets.

Good point, BG5150, but a brokerage window, or ETFs, are going to be qualifying assets, right? So nonqualifying assets would only be a problem if they were not going to use a brokerage window and wanted to hold actual gold and/or bitcoin. And in that case for the gold you'd have to steer clear of IRC sec. 4975(m) also.

[BG5150]

Can you even hold those types of alternate assets in a brokerage account?

[Bill Presson]

4 minutes ago, BG5150 said:

Can you even hold those types of alternate assets in a brokerage account?

Probably through ETFs, but likely not directly.

[BG5150]

Sounds like the OP wants direct investment...

[rocknrolls2]

Allow me to interject here. If the doc wants to invest directly in bitcoin or gold, I am assuming that this is a participant-directed defined contribution plan, Code Section 408(m) subjects the investment in collectibles by an IRA or participant-directed defined contribution plan to treatment as a potentially taxable distribution (which is the treatment given to any prohibited transaction entered into by an IRA). The definition of collectible specifically includes an investment in metal or a coin (other than certain gold coins referenced in Section 408(m)(3)(A) or gold bullion described in Section 408(m)(3)(B)). Although bitcoin was not even contemplated at the time of the section's enactment back in 1981, the definition of collectible is sufficiently broad as to encompass bitcoin, subject to any determination made by the Treasury Department. The best alternative for the other doc is to have the self-directed brokerage account invest in a mutual fund or ETF investing in such assets.

[Luke Bailey]

On 3/1/2021 at 8:22 AM, rocknrolls2 said:

Code Section 408(m)

Thank you, rockenrolls2. My post referred to a nonexistent 4975(m). Note to self: Always doublecheck the Code reference when doing from memory.:)

Having said that, I would definitely check whether the client would be satisfied with ETFs indirectly investing in precious metals and BTC.