Is bitcoin prudent? Is art diversified? Offering alternative investments to 401(k) participants.

Abstract

•Whether 401(k) plans’ investment menus should feature “alternative” investments is a fact-driven inquiry applying ERISA’s fiduciary standards of prudence, loyalty, and diversification. Central to this fact-driven inquiry is whether the alternative investment class in question is broadly accepted by investors in general and by professional defined benefit trustees in particular. A similarly salient concern when making this inquiry is the financial unsophistication of many, perhaps most, 401(k) participants. Accounting for these considerations, this Article concludes that REITs, private equity funds, and hedge funds can, with limits, today be offered as investment choices to 401(k) participants, but that cryptocurrencies (including Bitcoin), art, and environmental-social-governance (ESG) funds cannot. These latter investment categories have yet to achieve acceptance among professional defined benefit trustees and thus are not yet prudent to offer to 401(k) participants—if they ever will be. •This Article explores each of these five categories as a class. Even if 401(k) participants should be offered choices within any (or all) of these classes of alternative investments, particular investments within each class must still be scrutinized individually for their compliance with ERISA’s fiduciary standards. The threshold, fact-intensive question that this Article addresses is whether, before considering specific investments, any generic category of alternative investments ought to be considered for the menu of choices offered to 401(k) participants. •Answering this question under ERISA’s legal tests of prudence, diversification, and loyalty requires such fact-driven inquiries as the general acceptability of a particular category of investments, the trustee’s motivation for embracing such investments, and the diversification achievable through such investments. While investment vehicles such as REITs pass these tests, art funds, Bitcoin, other cryptocurrencies, and ESG funds are not prudent to offer to 401(k) participants given such investments’ novelty and the