LLC as an investment

client would like to set up an LLC for the sole purpose of investing in an alternative investment for the plan. he would allow participants to invest in the alternative investment through the LLC?  what are the main issues?

Is this completely defensible under the standard ERISA fiduciary rules?  Has sufficient research been performed to ensure that the investment is safe and suitable for the plan participants?

Who would want to invest in something like this (excluding anyone possibly having a financial interest in the alternative investment or the LLC, which cannot be used as a reason for offering the investment since it would represent self-dealing and presumably violate the fiduciary rules if not a prohibited transaction)?  Aren't there safer investments that have potential returns adequate for purposes of a 401(k)?

Add to that the liquidity issues.

How do you value it every year?

if someone is invested in it and needs an RMD and the rest of their balance isn't large enough what do you do?  Is the value known well enough to even compute the RMD? 

What if they want a loan and the rest of their investment isn't large enough to fund what do you do?

If they are invested in it and terminate and part of their benefit is in this how do they get paid their full benefit?   Not only in terms of cash but value.  It will look bad if while the NHCEs get paid out on this investment they value is x and when the HCE finally gets paid an appraisal says it is 2x or 10x especially if there wasn't a formal appraisal in the past. (Or even if all the NHCEs get paid from teh plan and then the plan sells the investment for 2x or 10x)

Will this spin off a type of income that will trigger Unrelated Business Income Tax (UBIT)?

Do a search on this board on real estate in plans and the problems.  Just about everything I listed above has been the subject of  real estate in a plan. It seem to me you will have same type of problems with this.

The original post just referred to an "alternative investment", which could be almost anything, not just real estate.  For example, ownership of thoroughbred horses sired by a specific Kentucky Derby winner could be referred to as an alternative investment, or an original Picasso, or a shoebox full of 100 year-old baseball cards.  There is, however, an implication that the "asset" may be hard to value and may be hard to liquidate when necessary (especially if a partial liquidation is needed), which makes investing 401(k) money into it problematical (especially when filtered through an LLC established just to hold and/or maintain the asset).

In what way would the existence of an LLC make things better?

9 minutes ago, My 2 cents said:

The original post just referred to an "alternative investment", which could be almost anything, not just real estate.  For example, ownership of thoroughbred horses sired by a specific Kentucky Derby winner could be referred to as an alternative investment, or an original Picasso, or a shoebox full of 100 year-old baseball cards.  There is, however, an implication that the "asset" may be hard to value and may be hard to liquidate when necessary (especially if a partial liquidation is needed), which makes investing 401(k) money into it problematical (especially when filtered through an LLC established just to hold and/or maintain the asset).

In what way would the existence of an LLC make things better?

I wasn't claiming it was real estate.  I just said that to me many of the problems of real estate in a plan seem to be true here. 

Whenever I hear of plan sponsors asking about "alternative" investments the first thing that comes to mind is they are looking to somehow benefit themselves and since they don't have enough disposable money to do this on their own outside the plan, or maybe even enough in their own plan account, they try to justify putting employee/participant retirement funds at risk so they can take advantage of this unique opportunity. Unless, and only unless, this alternative investment is prudent for retirement funds and is made solely in the best interests of plan participants (not the owner/plan sponsor) will it be OK. A colleague owned a piece of a racehorse than ran in the KD a few years back, and she ended up with net income when it was all said an done, but that didn't mean it was a suitable 401(k) investment. The fact that an LLC has to be established and the plan could not directly invest in this asset leads me to believe it would not be retirement plan suitable and a big fiduciary mistake.

55 minutes ago, My 2 cents said:

In what way would the existence of an LLC make things better?

Exactly!