Solo 401k Investments in Startups with Plan Funds

[dragondon]

The investment adviser of one of the 401k's that we manager would like to use his solo 401k retirement funds to invest in a startup. If he has no existing connections with the start up and no other investments in it is this an allowed transaction with their 401k funds or would this be considered prohibited? 

[Paul I]

It is tempting to offer an opinion because as a TPA we try to be helpful, but we do not advise clients on whether holding a particular asset is allowed or is prohibited.  We do not have the expertise to make that assessment.  Providing such an opinion very likely would be not be covered within the scope of our E&O coverage should the investment be found to be prohibited or it is a total bust and the investment adviser starts looking for deep pockets to recoup the taxes and penalties or to cover the loss.

If an investment adviser is asking, then likely the question also is beyond his areas of expertise.  Consider pointing out to the adviser a need for competent legal advice.

[truphao]

Totally in agreement with Paul.  Here is one rule of thumb I use when hearing "iffy" questions.  If somebody asking a marginable question which does not pass the smell test it is very likely they know the answer to begin with but do not like the answer....If it walks like a duck...

[Lou S.]

A good reply might be "That's an excellent question. Here is the name and number of a qualified ERISA attorney who might be able to help you answer it."

[Peter Gulia]

If the person seeking to invest in a startup is a representative or other supervised person of an investment adviser or a securities broker-dealer, he might want his lawyer’s advice about what he would disclose to each firm he is a representative of or otherwise associated with, and how those firms might treat the investment as a personal securities transaction, an outside business activity, or both.

Or even if the might-be investor is the sole owner-operator of his investment-advice business, he might want his lawyer’s advice about what must or should be disclosed to securities regulators and, perhaps, to his clients and prospective clients.

[FishOn]

If this is adviser is licensed and has a broker/dealer, the adviser is required to first get approval from his B/D for any outside business activity.  They do not have a sense of humor in disclosing after the fact or using the "I didn't know" routine.  

[ErnieG]

I would advise him to visit https://www.irs.gov/retirement-plans/rollovers-as-business-start-ups-compliance-project  We are trying now to unwind one, the business owner had no idea of the downsides and was sold on the fact that all the money he had in his Plan could be seed money for a startup.  Good business for the ERISA Attorney.  Good luck.

[Peter Gulia]

In my experience, an unwinding of a ROBS brings plenty of billable hours; but no prospective client ever has been willing to spend even a small amount to set up correctly a retirement plan's investment in a new business.