Doctor group 401(k) allows for self-directed accounts. 2 docs want to invest a portion of their account in a venture capital fund. (One of the docs is one of two plan trustees) Investment would be in the form of limited partnership interests. I have read the limited partnership agreement and private placement memorandum and am trying to come up with the reasons this is not a good idea.

So far my list includes:
-potential prohibited transactions (depending on who the other limited partners are)
-severe illiquidity of investment
-possible UBTI

Can anyone add to my list?

A limited partnership interest is supposed to be valued periodically. Unless it is publicly traded, it is unlikely that ths value can be determined without hiring an outside appraiser. The last time I had to do one of those (in the early 1990s) it cost over $10,000.

You have to have a REALLY good return on investment to offset that kind of expense.

If this is a small plan, they may have a problem with the small plan audit waiver rules. The value for non-qualifying assets ususally can't be determined until well after the year end. If the total value of non-qualifying assets increases unexpectedly, you may find the bonding amount is not sufficient to use the audit waiver exemption.

I'll second that getting a market value for the asset will be a pain in the ...

another fact I omitted in my initial post is that the minimum investment is $500k. I keep reading about nondiscrimination implications when there is such a large minimum investment threshhold.

Thanks for all of your thoughts. These docs are really keen on the idea so I want to make sure I give them a laundry list of reasons this is risky investment ot make using qualified plan money.

Whenever an investment has it's own line on Form 5500 (Schedule I, 3(a), Did the Plan hold Partnerships or Joint Ventures at any time during the Plan Year? If so, add the value at the end of the Plan Year.), it screams AUDIT FLAG to me.