Do alternative investments belong in your 401(k)?

If you’ve been investing in a 401(k) plan, you’re probably used to being given a menu of investments to choose from. In the months ahead, you might see the menu become more varied. 

Recent changes in regulatory guidance have opened up 401(k) investments to more complex and risky types of assets. Think of the addition of these new 401(k) alternatives as the menu getting spicier and more exotic. 

The question is, are these new 401(k) alternative investments good for you? That depends on your situation. Certainly, the starting point is making sure you have a solid understanding of these alternatives. Then you can decide whether you want to sample them in your 401(k) plan or stick to more traditional choices. 

What are alternative investments? 

Alternative investments are assets that are either relatively new types of investments or others that haven’t traditionally been used in retirement plans such as 401(k)s. 

These asset classes give investors additional opportunities to earn investment returns and to diversify beyond traditional stock and bond portfolios. They also present new, and sometimes higher, forms of risk. 

Some things that start out as alternative investments become more mainstream over time. For example, 50 years ago, small-cap stocks and international investments would have been considered edgy choices for retirement plans. Now they’re commonplace. 

It remains to be seen whether today’s alternative retirement investments will eventually gain that kind of acceptance. One of the questions you must ask yourself is whether you want to be part of the experiment with investing in alternative assets in 401(k) plans, or whether you’d rather wait until they’ve been more thoroughly tested by investors. 

Examples of alternative investments 

There are several types of alternative investments. Which one you might have access to in your 401(k) plan is up to your plan sponsor. Below are several prominent types of alternative assets investors may encounter when exploring 401(k) alternatives. 

Cryptocurrencies 

Cryptocurrencies are digital tokens that are used as alternatives to traditional currencies such as dollars and euros. They are traded on electronic exchanges, and their value is determined by supply and demand. 

Bitcoin and Ethereum are two of the most widely known cryptocurrencies, but there are thousands of different ones. Cryptocurrencies are lightly regulated compared with traditional financial assets, and both the value of some individual currencies and the industry as a whole have grown rapidly over the past couple of decades. 

Cryptocurrencies have also been known for occasional steep declines in value and for scandals involving different crypto exchanges and specific currencies. Ultimately, they do not produce any underlying earnings, nor do they pay dividends or interest. Their value is simply determined by what people may be willing to pay for them in the future. This is why they are considered a high-risk, speculative form of alternative investment. 

Private equity 

Equity is ownership in a company or property. When you buy a stock, you own a small piece of the company that issued that stock. However, issuing publicly traded stock is a lengthy and complex process. That’s why many companies choose to remain privately held. 

However, even privately held companies may allow outsiders to invest in them. This is done by negotiated terms involving the price, the information the investor is entitled to, and whether the investors have any say in how the company is managed. 

The attraction of private equity is that it can be an opportunity to invest in a growing company before it goes public. However, the information that private companies are required to disclose to investors is much more limited. Also, purchases and sales must be arranged by negotiation rather than being freely traded on an exchange. 

This lack of transparency and liquidity is one reason private equity investment strategies are generally considered advanced investment approaches. 

Private credit 

Credit is when you lend money to a company. A common form of credit is in publicly traded fixed-income securities such as bonds. However, some companies prefer to arrange for credit with investors privately. 

Investing in private credit can earn investors more favorable terms than investing in publicly traded bonds. However, private credit is subject to some of the same issues as private equity. There are fewer rules about what information the company must provide, and the ability to buy and sell private credit is much more limited than trading in bonds. 

Real estate 

Real estate is an asset class that can take on many forms. It can involve investing in houses, apartment buildings or factories, and other business facilities. The objective can be to benefit from the long-term rise in the value of such assets and/or to generate income via rent. 

Real estate investments can take the form of investing in an individual building or project, or in a diversified group of different properties. The latter form of investing is often done via a real estate investment trust (REIT). REITs are companies that are set up to invest in a range of different properties, though they often have certain characteristics in common. 

Investing in real estate is subject to the risk of the property market as a whole and risks specific to individual properties. REITs make it easy to diversify the latter form of risk, just as you’d typically invest in a portfolio of several stocks rather than owning just one. 

Commodities 

Commodities are things such as oil, steel, or grains that have value as raw materials. In addition to being traded in physical form, commodities are also traded via futures contracts and options such as puts and calls. 

Those non-physical forms of trading make it easier to invest in alternative assets like commodities. However, these types of investments typically are leveraged in ways that make them especially risky. 

Why has investing in alternative assets been limited in 401(k) plans? 

401(k) plans are covered by the 1974 Employee Retirement Income Security Act (ERISA). ERISA gives plan sponsors a fiduciary duty to act in the best interest of plan participants. This includes a standard of prudence when it comes to selecting investments for retirement plans. 

While plan participants get to choose from a menu of investment options in 401(k) plans, the choices on those menus are chosen by the plan sponsors. Because of the fiduciary standard, plan sponsors have traditionally been cautious about offering new and high-risk forms of investment. In the past, the Department of Labor has encouraged this caution by issuing guidelines about what types of investments may be appropriate for retirement plans. 

For example, in 2021, the Department of Labor issued a statement advising plan sponsors of some of the risks involved with including private equity in retirement plans. While this statement did not explicitly ban private equity investments from those plans, it gave plan sponsors plenty of reasons to shy away from those investments due to ERISA’s fiduciary standard. 

What has changed for 401(k) alternative investments? 

On August 7, 2025, the Trump Administration issued an executive order saying it was the government’s policy that alternative investments should be allowed in retirement plans. A few days later, the Department of Labor rescinded the 2021 letter that pointed out the risks of using private equity in retirement plans. 

While the Department of Labor has yet to issue specifics on which 401(k) alternative investments are approved for retirement plans, the executive order mentioned private equity, private credit, real estate and digital assets, among others. The one caveat is that in some cases, such as with digital assets, these investments should be in professionally managed portfolios rather than offered on their own. 

Even so, the change in regulatory emphasis has the potential to greatly broaden the range of investment options open to retirement plan participants — for better or worse. 

What you should consider before investing in alternative assets 

If your plan sponsor allows you to choose alternative assets in your retirement plan, how can you decide whether they are right for you? 

Below are some of the issues you should consider. 

Asset allocation 

Asset allocation is the mix of types of assets you have in your portfolio. For example, retirement funds have traditionally been comprised primarily of stocks and bonds. Younger investors with a bigger appetite for risk might have a higher allocation to stocks, while older investors have tended to favor bonds more. 

Allowing alternatives would add to the asset classes you can include in your retirement fund. You have to decide what role those new asset classes would play in your mix. 

Since different asset classes tend to behave differently, a broader asset allocation can increase how diversified your fund is. However, since some alternative asset classes are much riskier than traditional ones, this added diversification may actually increase the risk of your portfolio. 

Cost 

Traditional stock and bond portfolios can be managed very cost-effectively. Alternative investments often require more specialized expertise and labor-intensive research. Also, less liquid assets tend to trade less efficiently. These factors add to the cost of investing in them. 

Look carefully at the management fees and other costs of any options, including alternative investments. You may find that those fees would substantially erode any potential for added investment returns. 

Limited track record 

A problem with newer asset classes is that they have limited history. This makes it harder to tell how they would perform in different types of economic conditions. 

Adding to this problem is the fact that as newer asset classes gain popularity, more investors pile into them. This boosts returns, but once they’ve achieved widespread popularity, they would no longer benefit from that boost. 

You should always take past performance with a grain of salt when choosing investments. This is especially true when it comes to alternative investments. 

Expertise 

There are fewer investment managers with expertise in alternative investments. This makes it especially important to research the relevant experience of any managers who would manage those investments on your behalf. 

Liquidity 

Investments such as private equity and private credit are not traded on public exchanges. This means they cannot be sold immediately. It also means there may be a limited market when you try to sell them, which can adversely affect the price. 

Liquidity is more of an issue the closer you come to retirement age. So, if you plan on drawing on your fund within the next few years, you may want to be especially cautious about alternative investments. 

Financial transparency issues 

Publicly traded securities are required to disclose detailed financial information to the public. Private investments have no such requirements. Thus, information on things like sales growth, profit margins, and market share can be harder to come by. 

You’ll want to check that any manager of real estate, private equity, or private credit has the expertise and means to find out the information they need. Otherwise, they’ll be flying blind to some extent. 

Potential benefits of alternative investments in 401(k) plans 

Alternative investments offer two potential benefits: 

• More dynamic returns. Established asset classes are so widely followed that it’s hard to find opportunities for above-average returns. Newly emerging investments may create more opportunities to get ahead of the crowd. 

• Additional diversification. One way to manage risk in an investment portfolio is to own a variety of things that are exposed to different economic conditions. Ideally, this means that when one part of your portfolio is struggling, another part of your portfolio is doing well. 

Risks of investing in alternative assets 

Some of the risks you face when investing in alternative assets are the following: 

• Increased volatility. Alternative investments are often prone to wider swings in value. In other words, the potential for higher returns is often mirrored by the potential for greater losses. 

• Less transparency. There are generally fewer regulations governing the information that alternative investments have to provide about their financials and management. This lack of information can lead to unpleasant surprises. 

• Reduced liquidity. Alternative investments that are not publicly traded cannot always be sold as promptly when you need to. This also means that you can’t always get fair value when you sell. 

• Higher costs. Less liquidity and more complexity often lead to higher costs. 

• Regulatory risks. As alternative asset classes evolve, so do the regulations governing them. Thus, there is a greater risk that new rules may come along that create disadvantages for these assets. 

How to invest in alternative assets 

As a 401(k) plan participant, you don’t have to start from scratch when it comes to investing. You get to choose from a menu of options provided by the plan sponsor. 

Plan sponsors have an obligation to do some due diligence on the options they provide. However, in the end, it’s your decision whether they are the right investments for you. Look carefully at the issues explained in this article before choosing 401(k) alternative investments.  

Also, it may be better to wade in slowly with small allocations rather than diving into the deep end.