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June 13, 2022

Cryptocurrency in a 401(k) Plan?

There has been a lot of press coverage over the last few years about cryptocurrency. Articles about the pros and cons of Bitcoin, Ethereum, Litecoin and other types of altcoins have become popular topics and many have praised the new currency alternatives while others warn of the risks and dangers of using it. However, have you ever considered offering any of the cryptocurrencies in your company’s 401(k) Plan? Should you? What are the pros and cons of offering it as an investment alternative to your employees?

New to 401(k) Plans

First off, this is a relatively new area for 401(k) plans. Fidelity recently announced that it would begin offering cryptocurrency as an option to employers for their company-sponsored 401(k) plans. Most providers have not yet begun offering this option. So, although it probably is not available to you yet as an option, we thought it timely to consider the topic since other providers will probably follow Fidelity’s lead to keep pace in the industry.

Poll Findings

Quinnipiac University poll found in March of this year that only approximately 20% of Americans responded that they currently own cryptocurrency but 43% said they think it is here to stay and that it will become a dominant economic force for the long term. This seems to indicate that folks may want to include cryptocurrency in their longer-term financial strategies including their retirement plans.

Fidelity is allowing plans to provide for employee contributions of up to 20% in each payroll cycle and to have that same amount of total cryptocurrency assets in their plan account. Employers would be allowed to set the values for these amounts at a lower total amount. So, while 20% of a plan invested in cryptocurrency would not represent the majority of the assets by any means, it could still be a relatively large amount of money.

Advantages of Cryptocurrency in a 401(k)

One of the advantages of offering this an alternative investment for your Plan is that it would appeal to younger investors and those that want to be on the cutting edge of offerings. It would make the retirement plan more appealing to some. It would not be a required investment so for those unsure of the investment or wary of the risks (see below), they could elect not to use that particular investment option in their portfolio. No real downside there. For those investors that want to take the time to study the alternative, it is one more option to help diversify their portfolio. The poll referred to above found that 55% of 18-to-29-year-olds believe that cryptocurrency will be important in the future.

Understanding that this is a new option in the Plan, may get the 18-to-29-year-olds interested and increase participation. It may help your younger employees begin saving for the future. As the total investment in this option is limited, it would require employees that are not yet investing to still invest a minimum of 80% of their savings in other more stable options. This increased savings is one of the main reasons for offering a 401(k) plan in the first place.

The Risks of Cryptocurrency in a 401(k)

The cryptocurrency market has been a real roller coaster of ups and downs lately. Bitcoin was at a high when it closed at $69,000 in 2021. Over the recent past, it has been trading at $39,000. This is a very large variance in value. As retirement plans are supposed to be investments for the long haul and not meant to be day-trading type accounts, this value proposition is scary for the average investor that does not want or have the time/knowledge to spend reviewing current market trends.

Another risk to this type of investment is that regulation over this type of investment is limited or nonexistent. Do you really want your employees to take their hard-earned money and invest in an option that is not carefully regulated?

The Department of Labor issued a warning in March about offering these types of investments. The statement said, in part, “At this early stage in the history of cryptocurrencies . . . these investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss.” As mentioned by the Department, this is a relatively new type of investment and required careful evaluation. As most of the average 401(k) investors, do not have the time or expertise to make these evaluations, investing in this option presents a substantial risk.

We believe a Plan Sponsor should carefully consider this option and discuss the advantage and disadvantages with a seasoned investment professional before considering offering it to their employees. More consideration and study is definitely warranted.

For more information on how we can help, request a free consultation below or contact the team at (314)-886-7913 to discuss your unique 401(k) audit needs.

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