Edward Zelinsky (Cardozo), Is Bitcoin Prudent? Is Artwork Diversified? Providing Various Investments to 401(okay) Members, 54 Conn. L. Rev. 509 (2022):
Whether or not 401(okay) plans’ funding menus ought to characteristic “various” investments is a fact-driven inquiry making use of ERISA’s fiduciary requirements of prudence, loyalty, and diversification. Central to this fact-driven inquiry is whether or not the choice funding class in query is broadly accepted by traders basically and by skilled outlined profit trustees particularly. A equally salient concern when making this inquiry is the monetary unsophistication of many, maybe most, 401(okay) members. Accounting for these concerns, this Article concludes that REITs, non-public fairness funds, and hedge funds can, with limits, right now be supplied as funding decisions to 401(okay) members, however that cryptocurrencies (together with Bitcoin), artwork, and environmental-social-governance (ESG) funds can’t. These latter funding classes have but to realize acceptance amongst skilled outlined profit trustees and thus aren’t but prudent to supply to 401(okay) members—in the event that they ever might be.
This Article explores every of those 5 classes as a category. Even when 401(okay) members needs to be supplied decisions inside any (or all) of those courses of different investments, explicit investments inside every class should nonetheless be scrutinized individually for his or her compliance with ERISA’s fiduciary requirements. The edge, fact-intensive query that this Article addresses is whether or not, earlier than contemplating particular investments, any generic class of different investments must be thought of for the menu of decisions supplied to 401(okay) members.
Answering this query beneath ERISA’s authorized checks of prudence, diversification, and loyalty requires such fact-driven inquiries as the overall acceptability of a selected class of investments, the trustee’s motivation for embracing such investments, and the diversification achievable by way of such investments. Whereas funding automobiles corresponding to REITs cross these checks, artwork funds, Bitcoin, different cryptocurrencies, and ESG funds aren’t prudent to supply to 401(okay) members given such investments’ novelty and the failure so far of outlined profit trustees to extensively embrace such investments.
Hedge funds and personal fairness funds are, as a factual matter, nearer to REITs in mild of the widespread acceptance of those funds by outlined profit trustees. Consequently, as a category, such funds qualify as prudent for 401(okay) menus even when the trustee wouldn’t deploy his private sources to such funds and even when some (maybe many) hedge and personal fairness funds examined individually fail ERISA’s fiduciary requirements. Nonetheless, in mild of the monetary unsophistication of many 401(okay) members, the 401(okay) fiduciary who makes hedge and personal fairness funds out there to members ought to restrict members’ potential to make such various investments to guard members from making undiversified decisions.
These determinations could change over time with new factual circumstances, e.g., a larger acceptance of a selected asset class by traders, together with skilled outlined profit trustees as gatekeepers for the 401(okay) universe, and the emergence of strong markets that present extra expertise with explicit funding classes. However, the strategy is in the end what counts, because the norms of prudence, loyalty, and diversification, utilized to present information, govern the development of 401(okay) funding menus.
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