Would you add crypto to your 401(k) retirement account? Should you?
The question has become more pertinent this week after Fidelity Investments, the country’s largest provider of 401(k) plans, said it will allow participants to put a piece of their retirement savings into bitcoin — if their employers greenlight it. It’s the first large retirement plan provider to open the cryptocurrency door for retirement savers following one small company, ForUsAll Inc., last year.
But financial experts that Yahoo Money spoke with are wary about the new option and the risks involved.
“As an advisor to 401(k) plans, I would be very hesitant to recommend bitcoin in a 401(k) and subject the trustees to that liability,” Ronald Rogé, a certified financial planner and chairman an CEO at R.W. Rogé & Co. in Naples, Fla., told Yahoo Money.
Here are their concerns.
Lack of diversification
Retirement funds are typically spread across a wide range of assets from stocks to real estate and bond fund indexes. Funds should also be diversified within asset classes, such as balancing stocks from large and small companies and among dividend-paying stocks and foreign stocks. If a portfolio is well-balanced, then dips in markets may be stressful, but they’re built into the longer-term outlook.
But Fidelity's new crypto option for employers only includes adding bitcoin to their employees’ investment options. Employees can transfer up to 20% of their balance into a bitcoin-holding account and stash away up to 20% of their paycheck contributions. Employers, however, can lower those caps.
“It is one thing for Fidelity to set up a cryptocurrency fund where you're diversified across all these cryptocurrencies, it's another for them to just choose one out of the 20,000 cryptocurrencies,” Laurence Kotlikoff, Boston University economics professor and author of “Money Magic: An Economist's Secrets to More Money, Less Risk, and a Better Life,” told Yahoo Money.
“It's like they set up an investment where somebody takes your money and puts it on 22 Red at Foxwoods casino every other week on a certain night," he said. "The idea of a mutual fund, which is what Fidelity hawks, is selling diversification within a group or within a security type. This doesn't sound like diversification, they're just picking bitcoin.”
Exposure to fraud and theft
Since crypto’s bull market kicked off in the second half of 2020, bad actors have followed.
Last month, the Department of Labor, which oversees workplace retirement plans, stated concern about digital assets added to retirement plans. This was before Fidelity's latest move.
“The Department cautions plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan's investment menu for plan participants,” according to the DOL guidance. “These investments present significant risks and challenges to participants' retirement accounts, including significant risks of fraud, theft, and loss.”
Last year, scams and other cases of online fraud totaled $7.7 billion over 2021, an average of $1.925 billion in losses each quarter. This year, hacks have become the problem. So far, investors have lost over $1.22 billion to hackers in the first three months of the year, nearly eight times more than the $154 million lost in the first quarter of 2021, according to crypto security firm Immunefi.
“Bitcoin is like gold, but it's untethered. So why is it worse than gold?" Kotlikoff said. "Well, it’s hard to steal gold bars.”
The extreme up-and-down changes in value from cryptocurrencies — which so far are more volatile than stocks — is another concern. For instance, the S&P 500 index is off its January peak by 12%, while Bitcoin has lost more than 40% of its value since its November high.
“These investments can easily attract investments from inexperienced plan participants with expectations of high returns and little appreciation of the risks the investments pose,” Ali Khawar, acting assistant secretary of the Labor Department’s Employee Benefits Security Administration, wrote in a blog post.
“It can be very hard for ordinary investors to separate fact from hype,” he added. “When fiduciaries include a cryptocurrency option on a 401(k) plan menu, it signals to participants that knowledgeable investment experts have approved it as a prudent option. This can mislead participants about the risks and cause big losses.”
The volatility is also a red flag for many advisors.
“Given its volatility and uncertainty (there are thousands of cryptocurrencies and more being created every day), as thoughtful investors we are concerned that by making this easy for employees, it will lead to bad outcomes via speculation,” Eileen O’ Connor, a financial adviser and the CEO and co-founder of Hemington Wealth Management in Falls Church, Va., told Yahoo Money.
Meantime, the gambling nature of investing in cryptocurrency can’t be ignored.
“The myriad of get-rich-quick stories out there about bitcoin will tempt employees (especially those with lower incomes) to make speculative investment decisions when we already have a retirement-readiness crisis in this country,” O’Connor said.
If you’re going to invest in bitcoin anyway
Understand what you’re investing in.
“We have increasingly had many clients ask about it as part of their overall asset allocation,” O’Connor said. “We always ask what they think they are investing in when they buy bitcoin, an investment that will appreciate like gold or a technology stock, or something else—few have a good answer.”
Moreover, the truth is, many employers are unlikely to make the leap to offer crypto investments anytime soon, despite Fidelity's option.
Under 2% of the 63 plan sponsors in a recent Plan Sponsor Council of America poll said they would consider adding cryptocurrency to their 401(k) menu. And a National Association of Plan Advisors (NAPA)-Net poll found that 88% of readers who responded said that cryptocurrency as a standalone investment option was “not on their to-do list” citing the volatility, risk, and lack of safeguards.
If your employer decides to offer the option, “factors like your age, time horizon, risk tolerance and personal circumstances determine whether it is appropriate to include bitcoin in your portfolio,” Marguerita M. Cheng, a certified financial planner and CEO at Blue Ocean Global Wealth in Gaithersburg, Md., told Yahoo Money.
For clients who insist they want to invest, O'Connor encourages them to set up an account outside of their portfolio and limiting investment to less than 5% of their portfolio. Kotlikoff is even more conservative.
“I would say put nothing more than like a half a percent of your retirement contribution [to bitcoin]," Kotlikoff said. "Treat it like a trip to Vegas.”
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon