'A Mortgage for Your 401(k)': Advisors See Peril, and Promise, in New Offering

Several financial advisors told me they have concerns about the heightened risks involved with leveraged investing, the complexity of the “plumbing” behind the platform, and the fees investors will pay to use the service. Others, including employers that have rolled out the solution, have praised the innovative thinking behind Basic Capital.

The firm’s founder, Abdul Al-Asaad, told me that early controversy over the approach stemmed from an assumption that margin loans are involved, or that the program is a kind of get-rich-quick scheme.

“That’s not what we are doing,” Al-Asaad said. “If it were, I would fully agree with the critics. Margin loans in the 401(k) plan context are a horrible idea. … This is more like a mortgage for your 401(k).”

Put simply, lenders give money to the 401(k) investor, which is used to invest in an index fund that includes both stocks and bonds (rather than to buy a house). The predictable bond returns are then used as payments on the principal of debt, and the upside of the stocks (like the growth in a house's value) goes to the account owner.

In the end, Abdul Al-Asaad said, it will be up to financial planners and the employers they serve to decide whether to embrace this model or continue with the longstanding approach of slow-but-steady wealth accumulation.

“The financial system has long allowed people in the middle class and lower-income groups to use credit to go into debt, with credit cards and student loans,” Al-Asaad said. “Our vision is to flip that on its head and allow people to utilize credit in a constructive way in order to build long-term wealth in the same way that highly affluent investors are able to do.”

What Basic Capital Is and Isn’t

The Basic Capital strategy is designed for long-term investors who intend to leave their money in the strategy for 15 or 20 years — or even twice that, Al-Asaad said.

“In order to take advantage of our approach, you cannot be nervous about what’s going to happen tomorrow or next week,” he said. “If you are utilizing leverage as we are offering it, and then you see the market go down and you want to sell, you’re going to realize outsize losses. You have to be prepared to ride out the markets over the long term in order for our strategy to work to your benefit.”

As noted, Al-Asaad likes to frame the strategy by describing it as a blend of what he calls the “three greatest financial inventions” of the 20th century — the mortgage, the index fund and the limited liability company.

“We believe there should be an equivalent of the FHA mortgage for investing — a way to access more capital upfront in order to buy long-term financial assets like index funds,” Al-Asaad said. “Basic Capital does this using preferred equity financing rather than loans.”

In this context, he noted, the LLC is “incredibly powerful” because it enables investors to take calculated risks while capping their losses at the amount they’ve invested. So, even if a market downturn happened and a leveraged investor sold out at the bottom, they would lose their retirement account but not their entire net worth.

At Basic Capital, Al-Asaad explained, funds are invested in a diversified portfolio of high-quality stocks and bonds. The bond portion generates reliable monthly yields that exceed the cost of borrowed capital. This steady cash flow, combined with the quality of the underlying assets, provides lenders with the confidence to extend financing — even without a personal guarantee.

“In short, our financing partners provide financing to our clients rather than investing directly in the market because they prioritize predictable and secure payment streams over the uncertainty of stock market returns,” Al-Asaad explained. “They are comfortable offering this financing on a limited-liability basis because your portfolio is invested in high-quality, cash-flowing collateral that provides consistent returns.”

Advisors’ Compliments and Concerns

Meg Bartelt, a certified financial planner and president of Flow Financial Planning, said she was concerned that the platform “violates the two cardinal rules of good long-term investing, which are to understand what you are investing in and to keep costs low.”

To give credit to the firm, “they are transparent about their model and their cost structure, but that doesn’t mean people are going to understand what they’re getting into.”

Bartelt noted that she appreciates Al-Asaad’s conviction that lower- and middle-income people can struggle to save for retirement due to competing short-term financial priorities like simply meeting the high cost of living or paying down toxic credit card debt.

“But that’s really a systemic problem and not something that a fancy leveraged investing platform can fix,” she said.

Bartelt also dislikes the positioning about “democratizing” a tool used by wealthy investors.

“Messaging like that plays on the fear and greed that influencer culture and social media culture breeds in us,” she said. “It’s a more attractive story than telling people to put 10% of your paycheck into a 401(k) at low cost for 30 or 40 years.”

Steven Fox, a CFP with Next Gen Tax Prep, shared a similar set of concerns, but he did compliment the ingenuity behind Basic Capital’s model.

“I appreciate the effort towards innovation, which is really needed in the retirement system,” Fox said. “In some cases, I could see this platform helping to solve problems for some investors. But, I also worry about using leverage in a way that amplifies risk for people who don’t understand what they’re getting into.”

For example, Fox said, it’s just not realistic to expect that a typical 401(k) investor will understand the potential drawdown mechanics of a leveraged portfolio — particularly one that is created with an LLC wrapper.

“Again, it’s innovative and it’s a cool idea, but it’s also complicated,” Fox said. “To expect people will understand what it means to be setting up a separate LLC and taking on no-recourse debt from a third-party investor, with everything facilitated by Basic Capital, isn’t realistic.”

The Road Ahead

Al-Asaad said he was optimistic about the Basic Capital platform’s prospects for growth. He expects that growth to be primarily fueled by progressive-minded retirement plan advisors who are willing to think differently about how they help their clients generate wealth.

“Our original idea was to work with the incumbents in the industry to give people this option to utilize credit to accelerate their retirement savings effort, but we were really dismissed by all the big firms you can imagine that we approached,” Al-Asaad said. “So, we said, why don’t we just do this ourselves and start our own recordkeeper and third-party administrator?”

At this juncture, Basic Capital has rolled out its own end-to-end retirement planning solution built around the leverage strategy, including an employer dashboard and a mobile application for participating employees.

“Something else I want to highlight is that we aren’t forcing people to invest 100% of their retirement portfolio into the leverage strategy,” Al-Asaad said. “You could choose to put 5% or 10% of your assets into the strategy and that would be just fine. We are big fans of diversification.”