Can I offer hedge funds in my employees' 401(k) plan?

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  1. Nikil Mohan

    Nikil Mohan Member

    Sir, My corporate client in US wants a specific answer to the above question.

    Thanks in advance for your kind reply, which I eagerly anticipate.
  2. Chandrashekar M

    Chandrashekar M Active Member

    The answer of whether an employer can offer hedge funds within the sponsored 401(k) plan is not a straightforward "yes" or "no" answer. When a plan sponsor offers savings options to its employees, it is taking on the role of fiduciary. This responsibility places first priority of managing the plan assets to the participants, acting solely in their best interest. When high-risk and low-liquidity investments, such as hedge funds, are brought into the mix, there is a lack of transparency to investors.

    For many participants, their current 401k is their only active retirement savings option; and so, it is not prudent of the plan sponsor to prompt contributions into such a vehicle. In fact, due to the IRS-imposed contribution limits into a 401k plan, the purpose of hedge funds and the intentions of their managers do not align with the majority of investors' risk tolerance.

    Plan sponsors and investors alike should both be aware of the commonly known high expense ratios and management fees typically associated with hedge funds. On average, these fees are charged in 20 percent or more, mostly due to the fund managers taking the profits off the top. Remember, the purpose of these vehicles is to offer the managers a ton of cash for investment in risky opportunities, leaving very little liquidity and flexibility to the investor. When the investment does well, fund managers typically take their earned reward immediately.

    This is not to say that hedge funds do not have a place in a long-term investment and savings plan; however, an overall view of financial goals should determine where, when and how much these vehicles should play a part.

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