Retirement powerhouse Fidelity recently announced that they will soon become the first major 401(k) provider to offer cryptocurrency to participants, allowing retirement investors to allocate as much as 20% of their contributions to Bitcoin as part of the core investment lineup. Many financial professionals and legislators, however, are advising extreme caution for sponsors and participants who choose to include Bitcoin in their 401(k)s. As one of the largest asset managers in the world, this move has the potential to impact 401(k) savers adversely should Bitcoin remain on its volatile path.
Bitcoin Continues Its Wild Ride
2017 may have been a promising year for Bitcoin, with values rising by nearly 1400%, but with these quick upswings have come punishing lows. This year, both Bitcoin and Ethereum, the next most-popular cryptocurrency, have seen drops of more than 10% in a single day.
According to reporting by CNBC in May, 40% of Bitcoin investors were underwater, as a result of recent downturns in crypto valuations at that time. And despite early hopes that Bitcoin might act as an effective inflation hedge, these have not been borne out — the currency’s volatility has kept it from serving as one. The fact that Bitcoin doesn’t behave predictably based on known market and economic conditions will likely provide significant challenges for investors looking to successfully diversify a portfolio with it.
DOL Advises Caution
Because some plan sponsors will soon have the option to provide Bitcoin investments in 401(k)s, the Department of Labor has issued a statement urging fiduciaries to proceed with extreme caution. Acting Assistant Secretary for the DOL’s Employee Benefits Security Administration Ali Khawar noted in a subsequent blog post that, among other concerns, the DOL worries that cryptocurrency investments “can easily attract investments from inexperienced plan participants with expectations of high returns and little appreciation of the risks the investments pose. It can be very hard for ordinary investors to separate fact from hype.”
Fiduciaries Should Proceed Carefully
Given the DOL’s warning, and the very real concerns raised by financial professionals about cryptocurrency’s volatility and high levels of risk, it’s advisable for sponsors to proceed with caution. Before including this option in their plans, sponsors should conduct due diligence, and they may need the help of an experienced advisor to do so.
It’s important to remember that crypto is a highly speculative, decentralized asset without the backing of any government or financial institution. Its value is based on supply and demand, and it isn’t supported by assets or income. Because of this, and because of the fickle nature and high competition of this speculative market (there were more than 19,000 forms of cryptocurrency as of May), it’s unclear what the fates of individual currencies will be, even Bitcoin.
Wise to Wait and See
PlanFees is committed to helping retirement plan advisors uphold their fiduciary responsibilities by ensuring reasonable fees and promoting positive outcomes for sponsors and participants. Due to market instability and the significant knowledge gap surrounding Bitcoin at the moment, it may be prudent for sponsors to wait and do significant research before adopting Bitcoin into their plans.
Sources
- https://www.cnbc.com/2022/05/09/40percent-of-bitcoin-investors-underwater-glassnode-data.html
- https://finance.yahoo.com/finance/news/bitcoin-isn-t-inflation-hedge-182941333.html
- https://www.dol.gov/newsroom/releases/ebsa/ebsa20220310
- https://blog.dol.gov/2022/03/10/cryptocurrency-concerns-why-were-working-to-protect-retirement-savings
- https://time.com/nextadvisor/investing/cryptocurrency/altcoins/
- https://www.barrons.com/articles/bitcoin-worth-to-fidelity
- https://www.nasdaq.com/articles/5-best-long-term-cryptocurrencies-to-buy-for-2022
