Crypto 401(k): Sound financial planning or gambling with the future?

Fidelity Investments, a US-based retirement plan provider, announced that April saw the introduction of Bitcoin (BTC) to the retirement savings accounts of 401(k). This makes crypto an option for future savings.

Many U.S. employers offer 401(k), which is a retirement savings program that offers tax benefits and allows for multiple investment options. Fidelity’s decision will make it easier to include Bitcoin in those investment options.

A typical 401(k), employees agree to receive a portion of their paychecks directly into an investment account. Employers often match some or all of the employee contributions.

Fidelity, the largest US retirement plan provider, will roll out BTC to its employees. If their employers choose to offer it, more than 40,000,000 people will be able to use the cryptocurrency. The initiative will allow investors to become long-term, tax-advantaged BTC hodlers by removing coins from circulation each month.

The plan allows companies to limit BTC allocations to 20%, and permits them to lower that threshold. However, cryptocurrency options are not new to 401(k),s. ForUsAll, another retirement plan provider in June 2021, partnered up with Coinbase to provide BTC exposure for its account holders.

ForUsAll filed a lawsuit against the Department of Labor, Secretary of Labor Marty Walsh and the United States District Court for the District of Columbia recently. The lawsuit sought to withdraw a compliance assistance release.

According to the release, the Employee Benefits Security Administration of the Department will conduct an investigation into 401(k), plans that contain cryptocurrency. Jeff Schulte, CEO of ForUsAll, said that the government was trying to limit the types of investments Americans can make. He stated that the government did this because people don’t like certain asset classes.

While questions of government overreach are important, it is also worth considering whether crypto assets can be included in retirement plans. Although the Bitcoin network has been around over a decade, it has outperformed all other asset classes so far. Analysts will tell you that past performance is not indicative of future results.

Crypto volatility and 401 (k) plans

Some investors might find digital currencies risky, given that crypto assets and Bitcoin are relatively new financial ventures only a little more than a decade ago. The volatility of cryptocurrencies is high, and they can plunge as much as 80% in bear markets. This could be disastrous for someone who is looking to retire.

Although employees don’t have to take money out of their 401(k), plans when they retire from the workforce, the purpose of having the money is to give them some comfort in their retirement years. It could be disastrous to wait for the market’s recovery or accept such large losses.

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Chris Kline, co-founder and chief operating officer of Bitcoin IRA — a cryptocurrency-focused individual retirement account provider — told Cointelegraph that there is a “growing conversation around the adoption of digital assets and their growing use case.”

Kline mentioned Senator Tommy Tuberville, from Alabama, who has recently introduced a bill called the Financial Freedom Act that allows Americans to add cryptocurrency to their retirement savings plans.

Kline stated that part of the current “retirement crisis” in the United States is due to Americans not participating in 401(k). He suggested that such moves could help to engage younger generations through their employer-sponsored plans, and help Americans to retire. Kline also added:

Although crypto is volatile, its resilience and relevance in its short life are amazing. Modern investing requires at least some exposure to crypto, and even more importantly, some experience with crypto.

Kline said that cryptocurrencies could have the exact same disruptive effect on money as the internet had on communication or email had on post offices.

Scott Melker, a cryptocurrency expert and host of the Wolf Of All Streets podcast, stated that investors should have “at minimum minimal exposure” to Bitcoin. Ether (ETH), however, is another option worth considering.

Melker stated that even a small amount in these assets could pose “idiosyncratic risks and the opportunity to place an asset [that] can rise when all else is falling.”

Bitcoin is not the only market that can crash before retirement. Today, crypto is performing poorly in retirement accounts for investors in tech stocks.

Melker stated that investors should have the option to invest in any asset that they choose for retirement. He concluded that self-directed IRAs “are popular for this reason” but that 401(k), holders don’t yet have such an option.

volatile asset class for diversified portfolios

In the last few years, cryptocurrencies have been considered an investmentable asset class by more people. There is clearly a demand for retirement savings. According to Investopedia’s survey, one out of four millennials reported using crypto to fund their retirement plans.

However, employers still remain skeptical. The Plan Sponsor Council of America recently asked its members, who are employers that sponsor qualified savings plans, if they would consider adding crypto to their investment options. Only 1.6% of respondents said yes.

Fross and Fross Wealth Management office, The Villages, Florida. Sculpture depicting a bull and a bear on a seesaw. This represents the changing markets. Source: Whoisjohngalt.

Cointelegraph spoke with Daniel Strachman, managing director at A&C Advisors, and independent trustee of Arca U.S Treasury Fund. He stated that cryptocurrencies were still “something that a diversified portfolio should include.”

Strachman says that an individual’s exposure to crypto assets will depend on many factors such as age, income and other assets. It’s all about investor education, Strachman says. Investors need to have access to significant information, content, and educational programs, regardless of how large their assets are.

Cameron Collins, an analyst at Viridi funds — a company that offers crypto and clean-energy investment solutions — echoed Strachman. Cointelegraph was told by Collins that sound cryptocurrencies such as Bitcoin are “great investments” and should be included in 401(k).

Collins says that scam tokens and memecoins have “no fundamental worth” and should not be allowed to participate in these types investments. Policymakers, investors, and plan administrators need to be aware of this important caveat.

He stated that cryptocurrencies offer “extremely high upside potential”, but do not provide investor protection. This can be a major drawback. However, the upside potential might be all an investor requires.

More opportunities for prudent managers

Thomas Perfumo from crypto exchange Kraken, head of business operations strategy, said that having more investment options across different assets may allow a prudent manager to maximize the long-term rate of return.

Perfumo spoke to Cointelegraph and noted that retirement is often associated low with risk. However, “This heuristic misses market” as $1 compounded over 30 year at an 8% interest rate will increase to more than $10 while the same $1 compound over 30 year at a rate of 6% growth to $5.74.

Perfumo says that optimizing the rate of return over time is “how an individual builds wealth and overcomes inflation, and eventually accrues enough money to retire comfortably.”

Perfumo said, “Risk tolerance changes over a person’s lifetime.” A person closer to retirement who may have substantial savings will have a lower risk tolerance for investments like cryptocurrency.

He said that individuals who are just starting out in their careers have the “more ability to take on risk” and will likely spend more of their capital toward risk-on assets.

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Perfumo stated that crypto-related risks to retirement investment plans could be due to fiduciaries not acting in clients’ best interest by jumping into risky products or misallocating clients’ capital relative their risk profiles.

However, someone who wants to manage their own retirement portfolio should have all options available, provided they are aware of the risks.

Investors who want to keep their assets for a longer time can add cryptocurrency to their 401(k). This will allow them to make tax-efficient investments. As with all financial decisions, it is important to consider the risk profile of investors and seek advice if needed.

The risks associated with cryptocurrency investments may not be suitable for everyone. Although they are voluntary, investors who fully understand the risks may find them to be very beneficial.

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Eileen Wilson

Eileen Wilson –Technology and Energy My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.

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