Bitcoin Is Coming to Your 401(k), If Your Employer Allows It

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Fidelity, the nation’s largest provider of 401(k) retirement plans, has opened the door for a future of crypto nest eggs: the company announced it would soon allow a portion of participants’ contributions to be held in Bitcoin.

Employees who work for one of the 23,000 companies that use Fidelity’s 401(k) services will be allowed to allocate up to 20% of their portfolio to the world’s largest cryptocurrency, the company announced last week. But that’s only if their employer lets them. It seems unlikely employers will take advantage of this opportunity, given the widespread opposition to it, even from the U.S. Department of Labor.

“From what I’m hearing, most employers are on a wait-and-see basis,” says David John, a senior policy advisor at the AARP Public Policy Institute.

According to the Plan Sponsor Council of America, only 2% of the 63 employers that were polled would allow cryptocurrency to be included in their plans. John says that based on his recent conversations and research, the Labor Department’s disapproval has had a huge impact in dissuading employers from taking on the risk.

Employers have the legal duty of offering prudent investments to their retirees. This is based on 1974’s Employee Retirement Income Security Act, which encourages more careful decision-making. “You’ve seen a wide number of lawsuits against employers, charging that their investment mix is wrong, or that the fees are too high,” John says. “So I’ve heard employers saying, ‘Maybe we’re going to wait and see how this all plays out.’”

Fidelity’s announcement came the month after the Labor Department fired a warning shot at retirement plan distributors. In a statement, the department’s Employee Benefits Security Administration (EBSA) argued that cryptocurrencies “present significant risks and challenges” to future retirees, and that employers that try to offer such plans “should expect to be questioned.” Bitcoin’s volatility compared with traditional markets has been highlighted over the last few months: it’s down about 40% from its November high, while the S&P 500 has dropped 10% over the same period.

Fidelity, however, argued that it’s simply giving investors what they want. A 2021 study by the company found that 30% of U.S. institutional investors polled “would prefer to buy an investment product containing digital assets.” Dave Gray, Fidelity’s head of workplace retirement offerings and platforms, told the Wall Street Journal that Fidelity is seeing “growing and organic interest from clients” in cryptocurrency, especially those with younger employees.

The decision will kick in “mid-year,” according to Fidelity. Fidelity stated that employees will be limited to integrating Bitcoin in their portfolios. Gray stated that it is possible for other altcoins to be made available at some point in the future.

Microstrategy (a data analytics and data management firm headed by Michael Saylor) was the first company to take up the offer. Microstrategy holds the 2nd-largest amount of Bitcoin among publicly traded companies. Saylor on Twitter argued that Bitcoin is a sound alternative investment when “equities appear increasingly risky and bonds seem structurally defective.”

Other experts and the Labor Department disagreed. Last week, acting assistant EBSA secretary Ali Khawar doubled down on his department’s original stance, telling the Wall Street Journal that they have “grave concerns” about Fidelity’s decision. He did however state that they wouldn’t ban cryptocurrency from retirement accounts.

Vanguard, one of Fidelity’s major competitors, released a statement in November arguing that “since cryptocurrencies are highly speculative in their current state, Vanguard believes their long-term investment case is weak.”

“I think it’s a horrible mistake at this point,” John says of Fidelity’s decision. “Bitcoin is exciting, interesting and innovative. But for retirement, you need to have a dependable source of savings and income as opposed to what you might ‘play-invest’ in. We only have a few years of data—and there is a very strong possibility of a very sudden and precipitous drop at the wrong possible time.”

John also pointed out Fidelity’s decision to allow investors to hold up to 20% of their portfolios in Bitcoin is far higher than the cap for comparably volatile investments. “When we look at most of the alt investments, like real estate investment trusts or private equity, the usual proportion for risky investments is along the lines of two to three percentage points,” he says.

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