precious metals in 401(k) Plan?

[Jim Chad]

A client is worried about the economy and would like to put a few hundred thousand dollars of his Profit sharing into precious metals? Can anyone tell me if this can be done legally? and who does it well?

[ESOP Guy]

Does it have to be the actual metal? I mean obviously the easiest way to get into the asset class any more is ETFs. If he has to have the gold coins in a vault that is a different story. I just don't remember if you can have gold bars and coins in a 401(k) but I know you can have the ETF as I have seen them a number of times without anyone objecting.

[BG5150]

Plus, ETF's wouldn't be subject to the bonding issue if more than 5% was put into metals.

What kind of plan is this? Title says 401(k), post mentioned profit sharing. Are there individual accounts, or a pooled account? Are there other participants? You mentioned "his" profit sharing account. Would others be allowed to invest also? Are the accounts in individual brokerage accounts? If not, does the plan allow for them?

[My 2 cents]

If the stock market falls 50%, it would adversely affect the entire economy. Jobs would be lost, spending would drop, companies would close, etc.. If the price of gold falls 50%, who, besides those holding gold, would be impacted? Would jobs be lost, companies fail, etc.? Gold, by itself, may be used by some investors as a hedge against economic dislocation due to political instability or heightened inflation, but what value is there to the economy of people investing in gold? Investment in gold does not encourage any sort of economic growth. In fact, money invested in gold is not available for productive economic use.

"Who does it well?" Isn't gold as much of a commodity as a commodity can be? How can one player in the gold marketplace do it better than anyone else? Or worse (unless their "management fees" are higher than the competition, but in truth, how does one "manage" gold?)?

[BG5150]

Gold isn't the only precious metal.

[My 2 cents]

Gold isn't the only precious metal.

Point taken. However, my comments, while referring only to gold, would apply equally well to any other "investment" that would just sit there being a lump (or, if one is talking about mercury, a pool). $500,000 worth of gold, $500,000 worth of platinum, $500,000 worth of anything that just sits there until you sell it - what difference would it make?

Plus, ETF's wouldn't be subject to the bonding issue if more than 5% was put into metals.

What kind of plan is this? Title says 401(k), post mentioned profit sharing. Are there individual accounts, or a pooled account? Are there other participants? You mentioned "his" profit sharing account. Would others be allowed to invest also? Are the accounts in individual brokerage accounts? If not, does the plan allow for them?

I do consider these comments and questions to be important, and these matters would have to be resolved satisfactorily for the participant to be able to make sure that the desired investment would be acceptable.

[Jim Chad]

To clarify what kind of plan, it is a Profit Sharing 401(k) Plan and he is about to make a big discretionary non-elective contribution.

And thank you for all of the comments. A lot of good food for thought.

[BG5150]

Jim, is the plan a pooled account, or are there individually-directed accounts? (or a mix of the two?) Is this a one-person plan? (i'm guessing not, if there is a couple hundred grand of PS!)

If they are individually-directed accounts, all participants must be allowed to invest.

If it's a pooled account, I think it could be done, however, the Trustee needs to make sure the investment is prudent for the plan and its participants.

[R. Butler]

I think that a plan can hold physical gold. See 408(m) pertaining to collectibles treated as distributions. The plan should use a custodian. Although he didn't actually end up investing in gold coins, we did have a plan sponsor that considered investing in gold coins and he didn't to use an independent custodan. We recommended against that.

408(m) Investment in collectibles treated as distributions

(1) In general

The acquisition by an individual retirement account or by an individually-directed account under a plan described in section 401(a) of any collectible shall be treated (for purposes of this section and section 402) as a distribution from such account in an amount equal to the cost to such account of such collectible.

(2) Collectible defined

For purposes of this subsection, the term “collectible” means—

(A)any work of art,

(B)any rug or antique,

©any metal or gem,

(D)any stamp or coin,

(E)any alcoholic beverage, or

(F)any other tangible personal property specified by the Secretary for purposes of this subsection.

(3) Exception for certain coins and bullion

For purposes of this subsection, the term “collectible” shall not include—

(A)any coin which is—

(i)a gold coin described in paragraph (7), (8), (9), or (10) of section 5112(a) of title 31, United States Code,

(ii)a silver coin described in section 5112(e) of title 31, United States Code,

(iii)a platinum coin described in section 5112(k) of title 31, United States Code, or

(iv)a coin issued under the laws of any State, or

(B)any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7) ^[2] requires for metals which may be delivered in satisfaction of a regulated futures contract,

if such bullion is in the physical possession of a trustee described under subsection (a) of this section.