Are 401k Crypto Investments a Good Idea?
According to a recent announcement, some employers may begin offering crypto options to employees as part of their 401k programs. As CNN Business reports, third-party plan administrators are pushing to have cryptocurrency as an included asset class, which could put pressure on more companies to allow crypto allocations. It begs the question: are 401k crypto investments a good idea?
While there’s overwhelming appeal for crypto as an investment vehicle, it might not be the best asset class for retirement savings. While there’s significant appreciation potential, crypto is also rife with volatility: something it’s demonstrating in 2022. Qualified retirement plans embody “slow and steady” appreciation, with a narrow risk-reward profile. Adding crypto to the mix could drastically expand that window.
Even investors willing to stomach the risk of 401k crypto could find themselves waiting for the opportunity to add crypto assets to their retirement portfolio. While the concept is gaining traction, it’s still a long way off.
The Push for 401k Crypto Investments
The popularity of crypto is undeniable. There are trillions of dollars in crypto investments in 2022, with more money pouring into this asset class every day. As a result, financial services firms can’t ignore crypto, or even delegate it as an “alternative investment” any longer. In welcoming crypto investors, firms are also looking for ways to normalize crypto investments and make them more accessible. The solution? Enabling retirement investments.
That said, there’s pushback from a large conglomerate of retirement plan sponsors. According to a survey by the Plan Sponsor Council of America, an overwhelming 98% of plan sponsors have no intent of offering crypto as an asset class within qualified retirement plans.
Concerns about 401k crypto are also the subject of scrutiny by the Department of Labor (DOL). In March, the DOL issued a memorandum that implied the fiduciary duty of investment advisors to steer retirement investors away from crypto. The DOL statement even went so far as to specify that employers could be responsible for risky crypto trades made through self-directed 401k plans. The implication is that even offering crypto as an investment class could open the door for plan sponsor liability.
With the potential for government intervention, it’ll be an uphill battle for plan sponsors to authorize crypto within qualified retirement plans… even if they wanted to.
Crypto is a Risky Retirement Asset
At its heart, crypto is something of an antithesis for retirement investing. Much of the appeal of crypto assets comes from its extreme volatility. Many investors buy up coins and tokens hoping they’re part of the next big boom, and new crypto assets hit the market every month to entice speculators. Unfortunately, most of these cryptocurrencies aren’t primed for long-term appreciation due to factors like excessive supply or low trading volume.
Even established coins like Bitcoin and Ethereum aren’t stable assets. Over the past 52 weeks, Bitcoin surged to nearly $63,000, then dropped to below $30,000 before spiking at more than $67,000 and tumbling back to $35,000. In 2022 it’s traded up and down erratically. Ethereum hasn’t performed much better, with even higher peaks and valleys.
For volatility traders, crypto offers plenty of room to profit. For long-term investors who want steady, stable appreciation over a period of decades, crypto isn’t the right asset class. If the crypto markets suffer a flash crash or specific assets fall from recent highs, investors nearing retirement could see a significant portion of their accumulated wealth evaporate at the wrong time.
Above all, crypto investments depend on price appreciation, which is driven by volatility. This is in contrast to an equity portfolio that can adapt over time. Growth stocks offer appreciation potential early in an investing journey, and compound interest enables rapid growth. Investors nearing retirement can shift into blue-chip dividend stocks or defensive investments to maintain their wealth. This just isn’t the modus operandi of crypto.
401k Crypto Could Come to Fruition
Despite all of the pretense against allowing 401k crypto investments, some plan sponsors are pushing to offer them. Perhaps the most noteworthy is ForUsAll, a retirement plan administrator that’s aligned with millions of small-to-medium-sized businesses. ForUsAll has announced its intent to offer crypto as an investment class through qualified retirement plans.
This announcement comes on the heels of a recent partnership struck between ForUsAll and Coinbase, the world’s largest crypto broker. The two companies will collaborate on a product called Alt 401k, which will enable workers to allocate as much as 5% of their 401k portfolio in cryptocurrency assets. ForUsAll hopes to demonstrate positive results from the experiment by capping crypto allocations, which it believes could lead toward more leniency in future allocation amounts.
There are Still Uncertainties to Navigate
As if there weren’t enough struggles in making 401k crypto investments work, taxation remains an ever-present hurdle. Right now, capital gains tax on crypto trading functions roughly the same as when incurred through the sale of equities. However, there are tax complexities that come into play when considering investments made through retirement accounts. Currently a gray area within the IRS’ purview, there are both opportunities and pitfalls to consider.
In short, 401k crypto allocations stand to be much riskier than most general investors should associate with. Crypto’s volatility and speculative nature doesn’t fit the paradigm of retirement investing. Moreover, government scruples and IRS uncertainty could result in future problems for eager crypto investors who overlook tax and risk implications. At the end of the day, it’s better to keep crypto out of your retirement accounts. At least for now.
