First of all, I hope you had a very Merry Christmas, and that your day was filled with good food, good people, and maybe a few presents that didn’t require an engineering degree to assemble.
But while we’re on the topic of gifts, I want to talk about something that showed up under the tree this year…but might actually be a lump of coal in disguise.
There’s been a big push to allow “alternative investments” into 401(k)s and traditional retirement plans. Private credit, private equity, private real estate…the whole gamut of investments that have traditionally been off limits (or simply out of sight) to regular retail investors.
Sounds great, right? Finally, more people with access to the opportunities available in the “private” investment world.
Not so fast.
When “Alternative” Loses Its Meaning
Slapping the word “alternative” on something doesn't make it truly alternative.
Part of what makes alts alternative is that they exist outside the traditional Wall Street-based system. They have different fee structures. Different liquidity terms. Different (and often far better) tax benefits.
But when these investments are forced into the same 401(k) wrapper that’s designed for stocks and bonds, it strips away most of what makes them valuable in the first place.
You get the asset class in name only.
What You’re Missing
When you invest in a real private deal (a real estate syndication, for example) you’re investing directly with your own capital. Maybe through a self-directed IRA if that’s where a lot of your money sits, but you’re still directing your capital into a specific, private deal.
You receive distributions that hit your bank account. You potentially benefit from depreciation or other paper losses that offset income. You have visibility into exactly what you own and how it’s performing.
With a 401(k)-wrapped “alternative”?
You’ll get distributions, sure. More accurately, your 401(k) gets distributions, and you’ll likely never get to use that cash until you’re 65 or older.
And those sweet tax benefits that make real estate (and oil & gas) so attractive? Gone. No pass-through depreciation from an apartment building. No intangible drilling costs from an oil well offsetting your W-2 income.
You get the asset class in name only. Your experience and outcomes are entirely different than if you had directly invested in a proper private deal.
The Public Market Problem
There’s another issue with these “alternatives” worth mentioning.
Once they’re bundled and sold to the masses through 401(k) platforms, they start to look and act more like public investments (i.e., stocks).
That means you’re exposed to the exact volatility that alternative investments were supposed to help you avoid. One of the biggest advantages of private real estate is stable, predictable returns uncorrelated to the stock market’s daily mood swings.
But when everyone can buy and sell these bundles through their 401(k), suddenly you’re back in the world of market sentiment, panic selling, and stomach-churning volatility.
(And if millions of people can invest in a fund, how “private” is it really?)
Why Wall Street Wants This
Wall Street doesn’t push for regulatory changes out of the goodness of their hearts.
They want your money in their ecosystem where they can control it, slice it, dice it, and skim fees at every step.
Democratizing access to alternatives sounds noble. But the real goal? More assets under management.
The Real Alternative
Look, I’m not completely anti-401(k).
But you need to understand the limitations of that money. And more importantly, you need to recognize when something marketed as a gift is just clever wrapping.
If you want real alternative benefits, you have to step outside the traditional system. It means taking responsibility for your own capital allocation decisions and working with sponsors you trust. You have to invest in private deals with sponsors who are doing real work on real properties. Not Wall Street suits selling financial sausage to the masses.
That might sound scarier than clicking a button in your 401(k) portal. But it’s the only way to capture what makes alternatives worth pursuing in the first place.
(Want more on this? This week’s podcast episode goes deeper into why Wall Street is pushing this change and what it means for passive investors.)