Cryptocurrency in 401(k)s
Fidelity takes the leap, but do workers understand both benefits and risks?
The investment giant’s workplace Digital Assets Account (DAA) will enable employees who are “comfortable with the risks and volatility of cryptocurrency” to invest in bitcoin within the core lineup of their 401(k) plan. Plan sponsors who decide to offer the DAA will establish employee contribution and exchange limits, and participants will “benefit from a fully integrated retirement plan, digital experience, and education to help them make informed decisions,” Fidelity says.
The first employer to take advantage of it will be the business intelligence company MicroStrategy, which plans to add cryptocurrency to its 401(k) plan later this year.
Fidelity is not a newbie to the digital investment world: It began its exploration of blockchain technology in 2014 with bitcoin mining, and in 2018 Fidelity launched a platform that offers custody and trade execution for digital assets to institutional investors. In 2020, Fidelity’s digital asset management business launched a private bitcoin fund that is currently available to accredited investors.
Still, recalling the DOL’s concerns about including crypto in 401(k)s—possible participant misunderstanding of cryptocurrencies, valuation concerns, volatile prices, and the changing regulatory scene—some observers might wonder how to take the news, whether to look further into crypto, consult with professionals, or wait and see before considering changing course on investment strategies.
For some perspective on the topic, we turned to Laura Varas, CEO and founder of Hearts & Wallets, a research and benchmarking firm that specializes in consumer saving, investing, and financial advice.
BenefitsPRO: Does the average American adult understand cryptocurrency, including its risks and benefits?
Laura Varas: We haven’t asked specific financial fluency questions around cryptocurrency, so we can’t provide specific data at this time on American adults’ understanding of cryptocurrency, including all its risks and benefits, but our research shows that consumers are using crypto—and in a dangerous way:
- One in four U.S. households now used crypto in 2021 (excluding households without any assets), with use almost tripling in the past year. That equates to 25 million households. In 2020, 8 percent of households said they used crypto; in 2021, that rose to 22 percent.
- Most (78%) of those who use crypto are trading crypto. (22% use it for payments; 66% only trade; and 12% do both.)
- Three in four crypto users (72%) say they use crypto because “high volatility creates opportunities to make money trading.” And 15 million households trade specifically for the volatility.
- Many are driven by a fear of missing out: Forty-four percent of crypto users strongly agree with the comment “Possibly missing out on investment growth is a bigger worry to me than the risk of losing money in the short term.” That’s compared with only 16 percent of non-users.
- Crypto use is greater among young consumers, with 39 percent of Gen Z, 38 percent of millennials, 27 percent Gen X, and only 6 percent of boomers saying they used crypto in 2021.
[Note: The above data is from our 2021 survey wave of our Investor Quantitative (IQ) Database, with 5,794 participants nationally fielded in September 2021. Overall, the IQ Database has more than 65,000 U.S. households dating back to 2010 and more than 100 million datapoints on consumer buying patterns and competitive insights. Research report: Crypto, Securities Lending & Fractional Shares: Balancing Access vs. Risk in Innovation (March 2022)]
BP: Why is Fidelity doing this? Beyond profit, what advantage is there that they might see?
LV: Fidelity continues to show its usual leadership. This product will help consumers do something they are already planning to do—but it will help them do it more safely, set in the context of a responsible portfolio.
We know some consumers are going to invest in crypto. Fidelity is providing guardrails with limits that certain plan sponsors may trim in the future. And Fidelity has said it will offer education to help plan participants make informed decisions.
A lot of younger consumers have a binary perception of investing as cash vs. crypto. Offering crypto in a workplace plan may engage more younger consumers with investing and get them to consider the entire array of investment options within a balanced portfolio. To me, real success for this product is if the participant then chooses to have a more responsible portfolio and actually decides to have less cryptocurrency outside of the plan than they otherwise would have.
Fidelity is a respected asset manager with decades of history of launching responsible products. The company adheres to compliance and offers education for its 401(k) offerings, and that will be important for this product.
It’s similar to the tech boom in the early 2000s. Then, Fidelity pioneered industry-targeted mutual funds to allow consumers to buy portfolios of companies in a slice of a sector all at once. This was still riskier than a diversified fund, but it allowed investors to target their hypotheses more safely than betting the farm on one company.
BP: Will changes be made in the crypto industry to address the DOL’s concerns?
LV: We can’t comment on changes that the crypto industry can or might make to address these concerns, but certainly educating consumers about potential risks is important for this and any other investment. Unfortunately, up until now, much of crypto investing has been on platforms without any accompanying education or limits.
BP: Could offering crypto in 401(k)s make an employer more vulnerable to litigation?
LV: That’s a great question. An employer would certainly need to plan carefully and consult legal counsel before making any offering, as has been true in the past with other types of investments.
BP: Are you hearing about any other types of concerns not mentioned above?
LV: Not at this time, but it’s early and other concerns will probably surface, as well as benefits.
BP: What are the benefits to offering crypto in 401(k)s?
LV: A main benefit is that this offering will come with limits around how much can be invested in crypto, as well as with education. In addition, certain younger investors who haven’t been engaged in workplace plans may now be interested—and, ideally, be open to a responsible portfolio composed of more than cash and crypto.
In the past, workplace retirement accounts were the introduction to investing for many. That isn’t necessarily the case with the pandemic and other disruptions to work and life. Recently, Silicon Valley new entrants have been successful in targeting younger consumers, offering them risky things, including cryptocurrencies. Offering crypto inside of a plan may be a way to help younger investors to return to the fold where there are more protections.
Ideally, I’d like to see this educational platform broaden beyond workplace plans. Trading crypto, like all currency trading, is inherently risky. It’s important that consumers understand that.
BP: Are there safeguards or precautions to take that might make offering crypto easier or more viable?
LV: One way is to set limits, as Fidelity has indicated it will, of no more than 20 percent of plan assets being in cryptocurrency. That could possibly be even less, depending on plan sponsor limits. Currently, trading platforms allow consumers to put as much of their assets into crypto as they want. The 401(k) offering will have limits to help consumers not overindulge.
BP: What are the implications for 401(k)s, retirement advisers, and plan sponsors now that Fidelity has broken the ice?
LV: I couldn’t predict with certainty, but it seems like there could be others that will offer cryptocurrency and other options that get younger consumers engaged and investing to create a responsible portfolio to support them on their financial journey in life.
C.J. Marwitz is the editor of BenefitsPRO.