Cryptocurrency and 401(k) Plans—Risk vs. Reward
Published November 14, 2022

Cryptocurrency and 401(k) Plans — Risk vs. Reward

A resource for fiduciaries, plan sponsors, and plan participants.

In recent news, Fidelity Investments, the nation’s largest retirement plan provider, reported that by the end of 2022, some of the retirement plans it administers will begin offering plan participants access to invest in Bitcoin. This news broke just one month after the U.S. Department of Labor (DOL) began to advise care and caution when considering adding digital assets to retirement plans. The unbalanced opinions between the plan fiduciaries and the DOL boil down to whether the risk or reward is greater.

“Highest Known to the Law”

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law under the DOL that establishes the responsibility of plan fiduciaries. Fiduciaries are plan trustees and administrators of the plan. By law, fiduciaries must protect plan assets by managing the plan with prudence to minimize risk and loss. This role by the fiduciary is the Duty of Loyalty—the highest known to the law. The debated question in this instance is whether or not adding cryptocurrency to investment portfolios in retirement plans is imprudent.

Risks of Digital Assets Entering Plans

The greatest concern the DOL expressed regarding integrating digital assets into retirement plans is that the riskiness surrounding cryptocurrency will result in imprudent investment options, potentially causing fiduciaries to fail to act solely in the financial interests of plan participants, thus breaching their duties. A breach of duties makes the fiduciary personally liable for any losses to the plan. Additional DOL concerns include the risk of fraud, theft, and loss due to speculative and volatile investments; lack of consumer knowledge of crypto; lack of readily available funds for benefit payments and expenses; and lack of regulation within the digital asset industry.

Rewards of Digital Assets Entering Plans

Bitcoin was introduced in 2009, and now the cryptocurrency industry is worth more than $3 trillion, creating a sense that investors are missing out on the opportunity to invest their retirement savings in such potentially high-yielding investments. Fidelity’s decision to move forward with revolutionary strides to integrate digital assets into its participants’ investment options was not made lightly. The decision has cast cryptocurrency in the spotlight and created the perception that digital assets are for everyone, not just a limited population.

Fidelity has counterargued some of the DOL concerns, such as a lack of readily available funds for benefit payments and expenses. Fidelity asserts the digital assets account is a custom plan that not only holds Bitcoin, but also short-term money market investments, to ensure the availability of funds for timely distribution. While the risk is greater, participants currently have the ability to choose the riskiness and diversity of their portfolio. So, it may be more beneficial to have Bitcoin as an investment option rather than not, given there are appropriate disclosures and explanations to users regarding the risks surrounding its performance.

Regulation and Economical Changes Coming

Dramatic shifts in cryptocurrency values due to market volatility may impact fiduciaries’ decisions to move forward with integrating such investments into their plans. Additionally, U.S. Senators Kirsten Gillibrand and Cynthia Lummis have introduced the first comprehensive bi-partisan crypto legislation that would “create a complete regulatory framework for digital assets that encourages responsible financial innovation, flexibility, transparency and robust consumer protections while integrating digital assets into existing law.”  Introducing regulations and consistent treatment surrounding crypto may dissolve certain risks related to the expressed concerns from the DOL.

If you have questions about retirement plans and the impact of cryptocurrency, or would like assistance with compliance, business management, or audit and assurance services, contact a PYA executive below at (800) 270-9629.

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