‘Extremely, Extremely Risky’: Why Most Employers Probably Won’t Allow Bitcoin Into 401(k)s Anytime Soon

·9 min read
Money; Getty Images
Money; Getty Images

Fidelity Investments will soon allow bitcoin in its 401(k)s. But there’s a catch: Employers have to choose whether or not to take Fidelity up on that offer — and experts say deciding to do so could be detrimental to companies and retirement savers alike.

Cryptocurrency‘s popularity has recently skyrocketed. Investors can now easily buy and sell bitcoin and other cryptos similarly to how they trade stocks thanks to trading platforms like Robinhood and exchanges like Coinbase. According to White House estimates, around 16% of adult Americans — approximately 40 million people — have invested in, traded or used cryptocurrencies.

But while investors seem hungry for new ways to invest in digital assets, federal regulators are very skeptical of allowing investors to add cryptocurrency to 401(k) plans. Companies that take Fidelity up on the offer to add bitcoin to their retirement saving plan menus could be putting themselves in legal danger, experts say.

That’s because companies that sponsor 401(k) plans have what’s known as a fiduciary duty to act in plan participants’ best interest, and many experts say bitcoin doesn’t belong in retirement accounts due to its volatility and its relatively new, untested nature. For plan sponsors who have a duty to retirement savers, including bitcoin as an investment option when regulators are so clearly skeptical of it is “very much trying to swim upstream,” says Jeffrey Levine, chief planning officer for Buckingham Strategic Wealth. “It is extremely, extremely risky given the current environment.”

Fidelity is facing pushback

There’s been no shortage of new products in recent years that allow investors to dabble in bitcoin, including Venmo allowing users to buy crypto on its app and TurboTax giving taxpayers the option to get their tax refund in cryptocurrency. But Fidelity’s move is significant in that it will allow retirement savers to bet on the digital currency in their 401(k)s via one of the country’s largest retirement-plan providers.

Fidelity’s latest offering, which will be made available later this year, has plenty of guardrails, the company says: There will be “a variety of consumer protections, including investment limits, employer oversight and educational materials and resources to help them make informed decisions,” a Fidelity spokesperson told Money via email. The company will allow retirement savers to allocate as much as 20% of their nest eggs to bitcoin within Fidelity’s proprietary Digital Assets Account, yet employers that decide to offer the option could choose to lower that threshold. Account fees will be between 0.75% and 0.9%, not counting trading costs.

But officials at the Department of Labor believe Fidelity’s plan to allow employers to offer bitcoin in 401(k)s puts Americans’ retirement security at risk, according to an interview between The Wall Street Journal and Ali Khawar, acting assistant secretary of the Employee Benefits Security Administration, an agency within the Labor Department.

“We have grave concerns with what Fidelity has done,” Khawar said. Fidelity responded to the comments saying that its bitcoin offering “represents the firm’s continued commitment to evolving and broadening its digital assets offerings amidst steadily growing demand for digital assets across investor segments, and we believe that this technology and digital assets will represent a large part of the financial industry’s future,” according to the Journal.

This is not the first time the Labor Department has shown concern around cryptocurrency having a role in retirement savings. In March, the department published guidance cautioning employers to “exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.”

Sens. Elizabeth Warren, D-Mass., and Tina Smith, D- Minn., questioned Fidelity’s decision in a letter dated Wednesday addressed to Fidelity CEO Abigail Johnson, the Journal reported.

“Investing in cryptocurrencies is a risky and speculative gamble, and we are concerned that Fidelity would take these risks with millions of Americans’ retirement savings,” the senators wrote. Warren and Smith said they were also concerned about Fidelity’s potential conflicts of interest since the company has mined cryptocurrency, allows users with a Coinbase account to view their balances via Fidelity’s site and offers a crypto fund for wealthy investors.

Fidelity responded saying, “As a Massachusetts-based company with a proven 75-plus-year history of doing what’s in the best interest of our customers, we look forward to continuing our respectful dialogue with policy makers to responsibly provide access with all appropriate consumer protections and educational guidance for plan sponsors as they consider offering this innovative product,” according to the Journal. “Consistent with our ongoing dialogue with regulators and policy makers, we will respond directly,” the company added.

Vanguard, another of the nation’s major retirement-plan providers, has no plans to offer cryptocurrency in 401(k) plans, a company spokesperson told Money via email. Vanguard believes the long-term investment case for cryptocurrencies is weak since they are so speculative, according to its website.

Will companies take Fidelity up on this offer?

As the DOL reminded plan sponsors in the guidance published in March, the Employee Retirement Income Security Act of 1974 (ERISA) means sponsors have what’s called a fiduciary duty to act in their employees’ best interests when managing 401(k) plans. Fiduciaries who breach this responsibility can be held personally liable.

“Plan sponsors need to be very wary of leveraging Fidelity’s new bitcoin offering in retirement plans,” says John Palladino, managing director and investor advisor representative at 401(k) & 403(b) Fiduciary Advisors in San Mateo, California, which helps plan sponsors design and manage a retirement plan that makes sense for their company or non-profit.

“This is just an ERISA lawsuit waiting to happen,” Palladino says, adding that fiduciaries who understand their responsibilities and duties will likely “run for the hills” when it comes to this offer. “There are just way too many issues when it comes to volatility, the difficulty of making informed decisions, along with custodial, record-keeping and valuation concerns when it comes to bitcoin in a retirement plan.”

Of course, there will likely be some companies that take Fidelity up on this offer, Levine says, and he predicts that those companies will likely be in the tech space, and companies with younger employees. (Millennials and Gen Z tend to be more bullish on cryptocurrency than older generations.) Fidelity said in a news release announcing Fidelity’s new offering that business intelligence company MicroStrategy will be the first company to leverage this new product. MicroStrategy did not respond to Money’s request for comment on the potential dangers to plan sponsors when allowing bitcoin in 401(k)s.

Plus, competition for talent is fierce, with Fitch Ratings recently predicting that the U.S. labor market will recover all the jobs lost during the pandemic by the end of the summer. Companies are expanding their benefit offerings for employees, and retirement benefits are some of the top factors candidates consider when applying to a new job, says Alison Sullivan, a career trends expert at employer review site Glassdoor.

“While providing a competitive retirement package is a good way to attract talent, employees may be looking for different things from retirement offerings depending upon their stage of life and career,” Sullivan adds. “Younger employees may be more open to newer forms of currency because they’re further away from retirement and aren’t as impacted by market swings compared to those who want to cash-in on their retirement funds in the near term.”

In Fidelity’s new release, Dave Gray, head of workplace retirement offerings and platforms at Fidelity, said that there is “growing interest from plan sponsors for vehicles that enable them to provide their employees access to digital assets in defined contribution plans, and in turn from individuals with an appetite to incorporate cryptocurrencies into their long-term investment strategies.”

What are the risks of including bitcoin in your 401(k)?

Cryptocurrency is a risky and speculative asset that has proven its volatility time and time again. Bitcoin hit a high of $20,000 in 2017 before crashing to below $5,000 the next year. In 2021, it surged to around $68,000 per coin at its peak, but is now trading around $38,000. A 10% drop in a day is not uncommon.

The digital asset also isn’t regulated in the same way stocks and bonds are, and that unclear regulatory landscape makes crypto’s future uncertain. Earlier this year, President Joe Biden signed an executive order to establish the first-ever federal U.S. strategy on cryptocurrencies, and that effort is ongoing.

Levine says investors need to understand that there’s a difference between financial experts saying bitcoin doesn’t belong in 401(k)s and saying that you shouldn’t invest in cryptocurrency in general, adding that he’s not “anti-crypto” himself.

It’s one thing to invest at most 5% of your overall investment portfolio in cryptocurrency via a brokerage account or even a self-directed individual retirement account (IRA). It’s quite another to invest money you’re relying on for your future in such a speculative asset via your 401(k).

As mentioned, there are risks to the plan sponsors, too.

“I would be really, really cautious if I was advising a plan,” Levine says. He points out that even if someone doesn’t agree with the regulators who are so skeptical of cryptocurrency, until those regulators soften their positions, you have to consider adding cryptocurrency to retirement plans with a healthy dose of skepticism.

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