Many economists are predicting that after a deep recession or depression, it is likely the U.S. economy will experience a period of significant inflation. They believe that after COVID-19 is corralled, pent-up consumer demand will accentuate the monetary and fiscal stimulus policies required to boost the U.S. economy.
Whether or not you believe inflation will be a problem in the near future, gold has historically functioned as a refuge during harsh economic times — times like what most experts feel we will experience over the next few years.
Many investors believe that gold can be an effective hedge against inflation and falling stock and bond markets. Should you add a gold fund to your 401k plan? It’s not an easy decision, but here are issues to consider.
Reasons to Consider Adding a Gold Fund
Most 401k plans already offer a commodities fund to their participants. A gold fund is a focused investment option providing exposure to a small portion of the overall commodities complex. Here are some reasons to consider offering a fund like this.
The economists may be right
Inflation hasn’t been present to a significant degree in the U.S. economy for a long time. When it has raged, it has been very destructive. Gold has sometimes been an effective hedge during inflationary times.
We may experience a depression
Right now it is uncertain how severe this economic downturn will be. Besides being a potential inflation hedge, gold has often functioned as a store of value. If the very worst economic times are in our future, a gold fund may turn out to be an important investment in maintaining 401k balances.
A different future may require different thinking
It is easy to say that offering a gold fund is too risky. However, that doesn’t take into consideration what the future may look like.
With interest rates at 0% for the foreseeable future and corporations declaring bankruptcy or struggling to survive, it doesn’t appear as if the U.S. stock and bond markets will be good places to invest during the near term. In addition, it is hard to believe that international investing would yield better results.
Gold/precious metals may be one of the only bright spots for the next few years.
Reasons Not to Add a Gold Fund
These are very risky funds
Yes, they are. Will they be just as risky in the “new normal”? Possibly. Gold funds are extremely volatile, with values subject to factors that are difficult to quantify and measure.
Focused funds like this don’t belong in 401k plans
Historically, it hasn’t made sense for 401k plans to offer extremely volatile funds that only perform well given a specific set of unusual economic circumstances.
Also, gold funds may be diversified among producers within the industry, but not over the entire commodities complex. This lack of diversification and focus on a specific industry results in a more volatile and risky investment.
There is more fiduciary risk associated with offering these funds
There definitely has been in the past. Given that the future isn’t likely to look anything like the past, will this continue to be a fund choice with elevated fiduciary risk? Maybe.
Given the higher fiduciary risk, I am more likely to get sued
A corollary associated with higher fiduciary risk has always been a greater likelihood of being sued. And it doesn’t matter if you win, you still have to pay to defend yourself and potentially suffer a damaged reputation. So of course you want to avoid doing anything that may result in litigation.
Participants have a hard time understanding funds like this
Yes, they do, and that won’t change regardless of how the future turns out to be. If you want to introduce a fund like this, it would be smart to couple the offering with some education.
What You Should Do If You Wish to Add a Gold Fund to Your 401k
At least initially, limit the percentage of a participant’s account balance that can be invested in the gold fund you offer. I suggest that you consider limits from 10% to 25% of a participant’s total account balance. Recordkeepers should be able to code your plan to enforce this limitation without much of a problem.
These types of funds are difficult to understand. Without proper education, some of your participants are likely to unintentionally use the fund incorrectly.
It may not make sense to always offer this type of fund in your 401k plan. When and if the economy and markets return to what we might consider normal, there may not be a need for a gold fund in your plan.
Whether or not you decide to add a gold fund to your 401k plan, it is worth having the discussion with your retirement plan committee. We will need new thinking as we journey into the new normal.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or email@example.com.
Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or firstname.lastname@example.org or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.