Here's Why You Should Be Wary Of 401(k) Crypto Options
But is that a good thing?
If you're thinking of dipping your toe into this undeniable buzz, it's crucial you conduct a little due diligence. Professional fiduciaries have been pondering the enigma wrapped in a mystery that calls itself cryptocurrency.
What are their feelings about this highly volatile and complex digital asset? Why have so many been so reticent about adding this asset class to portfolios? How might their thoughts inform you?
Like any other hot investment, you only see the headlines trumpeting the good news. After all, no one ever goes to a cocktail party and enthusiastically brags, 'You won't believe how much money I lost on this stock!' The truth is, what goes up often goes down. And what goes up dramatically can just as quickly go down dramatically.
It's this downside that most alarms (or should alarm) retirement savers. For this reason, the Department of Labor issued a release in 2022 that told 401(k) plan sponsors to proceed carefully before offering investment options based on digital currencies.
'The DOL's Compliance Assistance Release No. 2022-01 cautioned plan fiduciaries to use extreme care when deciding whether to offer 401(k) plan participants cryptocurrency investment options,' says Michelle Capezza, of counsel at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in New York City. 'EBSA raised many concerns, including the possibility of fraud, the speculative and volatile nature of these investments, valuation, custodial and recordkeeping challenges, and difficulty for participants to make informed decisions. EBSA also warned about conducting investigations of plans that offered such investment options and questioned plan fiduciaries on their decisions to offer them in the plan. So, even though financial institutions brought products to market to facilitate these investments, including through digital asset accounts designed to address custody and cybersecurity issues, and through brokerage window models, the DOL guidance had a chilling effect on many plan fiduciaries and raised questions concerning whether they were subject to a new, heightened standard of extreme care review for cryptocurrency investments.'
Set aside the idea that this is about digital assets. Think instead about highly volatile stocks. As you approach retirement, you're more appreciative of certainty. The last thing you want is for your retirement savings to take a sudden drop just when you need to start withdrawing funds.
That's the way fiduciaries think. They look out for what's best for you. It's what being prudent is all about.
Now, there are those who feel it's one thing for a professional you willingly hire to take that demeanor. On the other hand, having the government tell you what to do? That just rankles some the wrong way.
In effect, the DOL's 2022 advice merely reiterated what every fiduciary should always do. When the DOL recently rescinded that ruling, it did not remove that duty. The hurdles for adding cryptocurrency to 401(k) investment menus remain today as they always have.
'DOL has now issued Compliance Assistance Release 2025-01, formally rescinding the prior release and, importantly, reaffirming for fiduciaries the legal framework governing the evaluation of what particular investments should be included within a 401(k) plan,' says Max Fuller, senior director of government solutions, TaxBit in Denver, Colorado. 'While the rescission is great, I am not sure it will result in the floodgates being opened for direct crypto investment within 401(k) plans just yet.'
It is this 'extreme care' requirement that has fiduciaries walking on eggshells.
'The new guidance opens up a Pandora's box of questions,' says Lyle Himebaugh, managing partner at GGA Retirement in Stamford, Connecticut. 'The first question is liability. I would imagine that most 3(38) investment fiduciaries are not equipped to do due diligence and therefore would not take on the liability.'
If fiduciaries continue to shy away from crypto, does that raise a red flag for you? Sure, they might be more concerned about potential liabilities than you might be. But that's precisely where the red flag pops up. Why?
The purpose of 401(k) plans is to provide long-term growth and, eventually, stability. This clashes with the inherent volatile nature of cryptocurrencies. The crypto risk magnifies as you approach retirement. But you can realize it at any age.
'Given turnover rates and the volatility of closing prices, there is considerable risk that participants would realize a loss when assets are distributed at separation,' says J. M. 'Jack' Towarnicky, of counsel at Koehler Fitzgerald, LLC in Powell, Ohio.
This is the big challenge with cryptocurrencies. They're on 24/7. If you invest in them, you'll have to be on your toes, ever watchful of what's happening in their markets. With digital assets like these, there are no 'closing bells.' Their prices can move at any time, day or night.
Still, the positive shift in the regulatory tone means crypto fans may advocate for these investments to be included in their 401(k) plans. While plan sponsors may bow to these demands, their service providers are likely to remain skeptical.
'I am sure some investment fiduciaries will put them in the plan,' says Himebaugh, 'but there are so many unforeseen and incalculable risks that it will have a mild impact.'
Because of these issues, don't be surprised if digital assets fail to become a mainstream 401(k) option as quickly as some hope. For one thing, it's not just a decision of whether to include them, it's how to include them.
'The challenges will the same as any asset class consideration,' says Jason Grantz, CEO of Integrated Pension Group in Highland Park, New Jersey. 'They'll have to prudently decide that having crypto available in plans is in the best interest of the participants, without conflict and not solely to appease a small handful of employees who might be clamoring for it. If the asset class does get added, the second hurdle will be even more daunting, which is to decide on which crypt or to simply offer a crypto fund, and that will need to pass Investment Policy criteria like other fund offerings.'
There's clearly retail interest in digital assets. It would not be a surprise if that interest spills over into the 401(k) realm. The rescission of the DOL's 2022 advice makes it harder for plan sponsors and their advisers to quickly rule out including cryptocurrency products on the plan's investment menu. The new DOL guidance, however, doesn't remove the best interest standards when evaluating the appropriateness of adding such investments to retirement plans.
'Fiduciaries now face the usual significant challenges in evaluating cryptocurrencies for 401(k) plans,' says Jonathan Rose, CEO of BlockTrust IRA in Beverly Hills, California. 'Issues like volatility, valuation uncertainty, custody risks, and changing regulatory oversight will be the focus, although each of these respective topics are making massive strides. The primary challenge fiduciaries will now face is a lack of experience in the cryptocurrency market itself, as demand from their clients increases. Many retail investors, 401(k) investors in particular, are looking for a solution that offers the unmatched upside of the crypto market with a minimized risk profile.'
Are professional fiduciaries the only ones wary of 401(k) crypto? Like annuities, the actual interest in these investments may be smaller than headlines would suggest.
'Prior to the 2022 guidance,' says Towarnicky, 'according to a GAO report, no surveyed 401(k) plan had added crypto as a core option, or a window to a crypto asset trading program, and less than 6 in 10,000 401(k) plans (about 300 total) offered crypto via self-directed brokerage windows.'
The regulatory bias against 401(k) crypto may be lifting, but that doesn't mean the fog has dissipated. The underlying risks remain significant. While the DOL has removed its heavy hand, it has not eliminated the fiduciary duty that goes with ERISA plans.
Cryptocurrencies expose investors to extreme volatility and difficult pricing mechanisms. The potential for losses at distribution is very real.
Does that mean you shouldn't invest a portion of your retirement assets in them? As with all investments, the decision depends on your individual circumstances. Making prudent decisions is the key, as the elements surrounding both your personal conditions and the cryptocurrency market are ever-changing.
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