Tuesday, April 13, 2021
Edward Zelinsky explains, in Is Bitcoin Prudent? Is Art Diversified?: Offering Alternative Investments to 401(k) Participants, 54 Connecticut L. Rev. ___ (forthcoming 2021). Here's the abstract:
Whether any category of alternative investments ought to be considered for the menus offered to 401(k) participants is a fact-intensive question.Central to this inquiry are ERISA’s legal tests of prudence, diversification and loyalty. These tests require such fact-driven inquiries as the acceptability of a particular category of investments to investors in general and to professional defined benefit trustees in particular and the trustee’s motivation for embracing such investments. Another important concern when making this inquiry is the financial unsophistication of many (perhaps most) 401(k) participants.
Real estate investment trusts (REITs) pass ERISA’s fiduciary tests because REITs now have a considerable track record amassed over six decades and have achieved broad acceptance, both among general investors and in the world of defined benefit pensions.In contrast, art funds, Bitcoin and other cryptocurrencies are today not prudent to offer to 401(k) participants in light of such investments’ novelty and the failure to date of defined benefit trustees to embrace such investments.
ESG funds are like art funds and Bitcoin, not objectively prudent under present circumstances and therefore not appropriate as a class for 401(k) investment menus. Hedge funds and private equity funds are closer to REITs in light of the widespread acceptance of these funds by defined benefit trustees.Consequently, as a class, such funds, if appropriately limited,qualify as prudent for 401(k) menus even if the trustee would not personally deploy his personal resources to such funds and even if some (perhaps many) such funds examined individually fail ERISA’s fiduciary standards.
These determinations may change over time with new factual circumstances, e.g., greater acceptance of a particular asset class by investors including professional defined benefit trustees as gatekeepers for the 401(k) universe; the emergence of robust markets which provide more experience with particular investment categories. But the approach is ultimately what counts as the norms of prudence, loyalty and diversification, applied to current facts, govern the construction of 401(k) investment menus.