Thursday , 18 August 2022

Can You (and Should You) Include Cryptocurrencies In Your 401(k)?

Don’t invest in Bitcoin or other cryptocurrencies in your 401(k) just because it’s cool. Deciding whether to include cryptocurrency in your qualified retirement plan depends on how you answer these these questions…

This version of the original article by Steve Parrish (kiplinger.com) has been edited [ ] and abridged (…) to provide you with a faster and easier read. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

1. Is crypto available in my employer’s retirement plan?

In April, Fidelity announced…[that] employers using Fidelity funds could choose to add a cryptocurrency offering in their 401(k) plans beginning later this year, i.e. if the plan sponsor…[chose to do so], plan participants would be allowed to allocate a portion of their assets to Bitcoin through an option on their 401(k) investment menu.

The announcement by Fidelity does not, however, mean that many employers will actually include this option as a choice in their investment basket for participants.

  1. There has been a flurry of class-action lawsuits filed against plan sponsors regarding excessive fees, inappropriate investment options and self-dealing and, given this challenge…[employers are reluctant] to compound this risk by including risky assets in the 401(k) lineup.
  2. The Department of Labor (DOL) has been very clear they believe crypto assets are not appropriate for most consumers…releasing guidance warning retirement plan fiduciaries to use “extreme care” when considering crypto investment offerings. This guidance will likely have a chilling affect for many 401(k) plan sponsors.

2. What “investing in crypto” really mean?

It could be investing in the well-known Bitcoin currency, but there are [almost 200] other cryptocurrencies [i.e. altcoins] as well…[and] it could also mean investing in companies involved with the storing, mining or managing of crypto assets. You…need to know the alternatives but] because of the newness of this alternative investment, and the risks involved, your choices are likely to be very limited.

At a minimum, to invest in such plans, you should have a general understanding of how cryptocurrency differs from fiat money and how blockchain compares to central banking. In other words, know what you’re getting into. This is an exciting new development in alternative investments, but it doesn’t follow that everybody needs to sign up or lose out.

3. What’s my motivation?

…[Is it] because of FOMO (“fear of missing out”)? Investing your retirement funds in an asset class because all the cool kids are doing it is generally not a good idea. Even the biggest fans of cryptocurrency agree that these assets involve significant risk.

4. Does the asset have a positive, negative or no correlation with other funds in your portfolio? 

This question addresses whether crypto might enhance the diversification of your retirement funds. For example, some investors feel that crypto offers a counterbalance to equities. When the stock market drops, Bitcoin may benefit. While this negative correlation may end up being true in the long run, the recent drop in the value of Bitcoin that coincided with the drop in stock prices has raised eyebrows. Crypto is still finding its place in the pantheon of long-term investment options. Before choosing crypto, understand its place in your investment mix as well.

5. If I were to invest in cryptocurrency would it be better to hold it inside or outside my 401(k)? 

  1. Tax law is still developing concerning crypto. In theory though, every time you use crypto as currency, you potentially have a taxable transaction. Pay for a pizza with Bitcoin that has appreciated, and you’ll have to report your gain. Besides the sheer inconvenience, consumers aren’t assured they will have adequate accounting of their digital coins. Cryptocurrency is a new industry and many of the intermediaries are not good at keeping track of tax basis.
  2. Another handling challenge is storage of your cryptocurrency. The stories are legendary of investors who misplaced their crypto wallets and ended up losing millions into the digital ether.

These kinds of issues largely disappear when holding crypto in a qualified plan. The currency is being held for long-term purposes, is not used for day-to-day transactions, and resides in a tax-deferred account. Further, fiduciary handling and oversight is supplied by the fund provider and plan administrator, and the plan participant receives the legal protections of the Employee Retirement Income Security Act of 1974 (ERISA).

The bottom line

If you’ve researched this alternative investment and see it complimenting your long-term retirement goals, your 401(k) plan may be the right place to make your first foray into the market. 

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