Fidelity Allows Companies to Offer Bitcoin in a 401(k), But Financial Advisors Warn It’s a Risky Bet
If you dream of retiring with a windfall of bitcoins, you might want to reconsider.
Bitcoin’s recent price crash has grabbed headlines for its magnitude – down more than a third since March and more than 50% since November. Some are now wondering if the sale could ripple throughout the economy.
Over the past week, the price has quietly stabilized at around $30,000. For the most ardent bitcoin supporters – and those with a high risk appetite – this may be a buying opportunity.
Financial services firm Fidelity Investments said it is giving businesses the option to offer employees the option to invest up to 20% of their 401(k) in bitcoin. This means that people who want to add bitcoin to their 401(k) should first see if their employer offers it.
“There is growing interest from (pension) plan sponsors in vehicles that allow them to provide their employees with access to digital assets in defined contribution plans, and in turn from people willing to incorporate cryptocurrencies into their long-term investment strategies,” said Dave Gray, head of workplace retirement offerings and platforms at Fidelity Investments.
In a follow-up interview, Gray said any company whose employees might be interested in digital currencies like bitcoin as part of the long-term transformation of the financial system should consider the product. It should not, however, be used as a short-term bet on crypto yields, he said.
“For (retirement) plan sponsors who choose to offer our product, this is an opportunity to buy over time, as they may believe this is the right long-term investment strategy to complement a traditional wallet,” Gray said.
Does investing in cryptocurrencies make sense for your retirement account?
Even before Bitcoin’s spectacular sell-off, one analyst spoke out vehemently against the idea of investing part of a 401(k) in cryptocurrency. In an April 27 note, Morningstar senior research analyst Madeline Hume wrote:
“While Morningstar is not against cryptocurrency — and full disclosure, I own bitcoin — Fidelity’s strategy for capitalizing on crypto momentum is misplaced,” Hume wrote.
“At this point, mixing bitcoin and 401(k) plans is a very bad idea.”
The differences between traditional investment vehicles like stocks and bonds and bitcoin are clear.
Stocks and bonds, which make up most retirement portfolios, are backed by underlying cash flows in the form of dividends or interest payments. These allow analysts to model or estimate the future prices of these investments.
On the other hand, bitcoin has no underlying assets, Hume said.
“The lack of fundamentals and valuations makes it a poor choice for a 401(k) plan,” she said, adding that bitcoin’s price is usually determined by speculators. These are individuals who try to convince others that the price of bitcoin will continue to rise.
Over time, most stocks or bonds will ultimately rise as the underlying companies grow and become more profitable.
But the future price of Bitcoin is almost impossible to predict, says Hume. He may go back one day, but his movements are driven more by these speculative narratives.
“Everyone has a neighbor or a nephew who hit hard in crypto, but even institutions are feeling the blood on the comebacks,” Hume said in a follow-up interview. She added: “There is no shortcut to retirement.”
That sentiment was echoed by Jackson Wood, portfolio manager and advisor at Freedom Day, a financial planning consultancy. Wood also writes about cryptocurrencies.
“401(k)s and IRAs are very important accounts for almost every American retiree,” he wrote in a May 11 post for cryptocurrency news site Coindesk.com. “These accounts are the best tools we have for building retirement portfolios, so the money in these accounts is extremely important to the owner’s future well-being. Allocating to a speculative asset like bitcoin simply because he’s suddenly available isn’t a wise move.”
Wood told NBC News that he doesn’t think many pension plan sponsors, also known as trustees, would accept Fidelity on his bitcoin 401(k) product.
“Even though it made waves and a lot of news, I doubt many trustees would feel comfortable with it,” Wood said.
Indeed, for more traditional businesses, the product seems like a no-go. NBC News asked a dozen Fortune 100 companies, as well as Twitter, if they made bitcoin available as a choice for their employees’ 401(k). Of those who responded, none said they offered such a product.
What are the risks and rewards of crypto as part of your 401(k) strategy?
Despite the risks, at least one employer has committed to offering Fidelity’s new product to its employees: MicroStrategy, a business services and software company. Its CEO, Michael Saylor, has been a strong supporter of bitcoin.
“MicroStrategy looks forward to working with Fidelity to become the first public company to offer its employees the ability to invest in bitcoin through our 401(k) program,” Saylor said in a statement. “Teaming up with companies like Fidelity that are innovating in bitcoin for businesses is important to us, as is developing the bitcoin ecosystem for institutional investors.”
Morningstar’s Hume said MicroStrategy’s announcement was likely part of its brand of being the first to enter the cryptocurrency space. According to a company presentation, MicroStrategy currently holds 129,218 bitcoins; at $30,000 each, it’s worth around $3.9 billion in total.
So far, Fidelity is the only major retirement services platform or investment brokerage firm to offer a bitcoin 401(k) product. Vanguard said it has no plans to do so.
“Given that cryptocurrencies are highly speculative in their current state, Vanguard believes its long-term investment case is weak,” he said in a September 2021 note to clients — his highest opinion. recent on the matter.
In a statement, a Schwab representative said that some of its products provide indirect exposure to cryptocurrency, but the assets of those products represent less than 1% of Schwab’s total 401(k) brokerage assets at the end of 2021. He did not elaborate on whether crypto is a good investment.
Bitcoin’s Recent Decline Calls Its Value into Question
Given bitcoin’s recent price volatility, it’s hard to know when, if ever, bitcoin would start to be seen as a mainstream investment tool.
Meanwhile, Fidelity’s product is offered despite recent guidance from the Department of Labor, which regulates 401(k) plans. The ministry has warned pension plan managers to be judicious when it comes to cryptocurrencies.
“At this early stage in the history of cryptocurrencies, the Department is seriously concerned about the prudence of a fiduciary’s decision to expose participants in a 401(k) plan to direct investments in cryptocurrencies. or other products whose value is tied to cryptocurrencies,” he said. said in March, before Fidelity announced it was offering bitcoin. “These investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft and loss.”
In an interview with NBC News, Acting Assistant Secretary of the Department of Labor Ali Khawar said not only is bitcoin too new, but the narratives surrounding it have obscured the greater risks associated with it.
“What we see is a universe where, for an individual saver, or even employers hearing that it’s the next sure thing – that there’s an element of ‘Enter downstairs or you going to regret it,” Khawar mentioned. “What we don’t hear is the other side of the equation, which is that this is a relatively young asset class, with a lot of tough questions to which there is no no answer, like how to value it, or even how it’s stored.”
In response, Fidelity’s Gray said it agrees with the department’s guidelines, although it notes that the company has not outright banned investing in cryptocurrencies. He said Fidelity adheres to strict security standards that would meet federal guidelines.
Gray added that he believes change is inevitable, citing data that showed younger generations of investors are increasingly tying their future wealth gains to cryptocurrencies.
“Among ‘Gen Z’, 39% use it, and for Millennials, 38%,” he said. “So from that perspective, we think the younger workforce will continually seek out a benefits package to give them access to investments that they are comfortable with because they grew up in this environment.”