Alternative Investment

Can a participant have a racehorse as an alternative investment in a 401(k) Plan?

A participant would like to purchase part of a racehorse using their 401(k) account and then hold the ownership in the Plan as an asset. Other than keeping all of it "at arm's length" and watching for obvious prohibited transactions and possible Unrelated Business Income, is there anything preventing this type of alternative investment from being held in a 401(k) Plan?

I don't believe it is impermissible under the Internal Revenue Code, at least I've never found anything that says you can't, but it might be prohibited by the Plan's Trust documents, Investment Policy and/or the Plan Trustee who oversees the investments.

If it is allowed by the Plan document and the Trustee will allow it, they you do have all the pitfalls you mentioned and possibly several more which can be quite easy to run a foul of and while I'm not an accountant I think you might lose some of the advantages allowed in the code, like depreciation of the asset which oddly I think applies to race horses for tax purposes.

It is not something I'd be interesting in touching, even if it was technically allowed, but you might find someone out there who would, though it might come with additional record keeping fees.

not only recordkeeping fees but  assets valuation fees as well, the value has to be reported on Form 5500, right?  In addition, the same type of investment has to be offered to other participants to avoid potential BRF issues.  Let me throw another wrinkle while we are at it - how are you planning on rolling over the horse into the IRA in case the plan MUST be terminated? I would not touch it either; it has "ain't worth the trouble" 40 feet high neon sign on it.

How is it going to be valued as of valuation date as it needs to be done so by an independent appraiser?

100% value has to be covered by a fidelity bond which is very expensive. This is an unqualified plan asset.

What is going to happen when the plan is closed as the participant cannot own it? What are you going to do, roll over part of the horse into an IRA?

How about the earnings from any kind races, stud fees, if at all, going to be allocated to the plan?

Just a few thoughts on dealing with intangible assets. this is even tougher as it is partial.

Do get an attorney for this, so many booboos can happen.

If an ERISA-governed plan’s trustee even considers holding the shares of the limited-liability company that owns a horse, pays the expenses of keeping the horse, and collects prizes and fees of the horse’s work:

The plan’s administrator might warn the participant that incremental expenses the plan would not have incurred but for the nonqualifying asset—for example, premiums for extra fidelity-bond insurance or fees for an independent qualified public accountant’s audits, and lawyers’ fees (see next paragraph) are charged to the individual account of the participant who directs investment in the nonqualifying asset.

The participant must engage her lawyer at her personal expense. And at least for the initial sets of transactions—forming the company and its LLC operating agreement, the company’s purchase of the horse, and the plan trustee’s purchase of its member interest in the LLC, the participant’s individual account is charged the fees and expenses of the plan’s trustee’s and administrator’s lawyers. (Other individuals should not bear expenses made necessary because of one participant’s directed investment.)

Likewise, the plan trustee’s extra fees and expenses for reading the LLC’s financial statements and otherwise monitoring the plan’s investment are charged to the directing participant’s individual account.

The plan’s administrator might require that the participant’s account always hold enough daily-redeemable investments so the administrator perpetually can pay all incremental plan-administration expenses without invading any other account.

In my experience, a person who thinks about using her retirement plan account to buy an unusual investment considers that way because she lacks money. But many of those also lack an account balance that’s enough to both buy the nonqualifying asset and reserve for the plan’s incremental expenses.

This is not advice to anyone.

And as we often say is this forum, just because you CAN do something doesn't mean you SHOULD.

How about a 20-pound vat of glue for your portion?

It's a sticky situation.