Can bitcoin in 401(k)s fuel prudent investing?

For one former Fidelity executive, bitcoin in workplace retirement plans evokes a very non-digital analogy: birth control.

Start with the real-life context: a FOMO-fueled frenzy over the 21st century’s biggest investing trend, in which scores of people feverishly trade volatile cryptocurrencies on platforms like Coinbase. Laura Varas, a former Fidelity vice president, sees that growing activity as reckless behavior that goes against the principles of prudent investing — like teenagers having unprotected sex.

So when Fidelity Investments said Tuesday that it would let investors hold bitcoin in their 401(k)s, Varas, the founder of Hearts & Wallets, a market research and benchmarking firm, said she thought of condoms. “Consumers are trading crypto now in a risky way that we’re concerned about,” she said. “Fidelity is enabling consumers to do something that they’re already doing, and in a more responsible way.”

It’s far from clear that financial advisors and regulators — crypto’s biggest skeptics — will agree.

Fidelity, the nation’s largest provider of workplace retirement plans, will let the roughly 23,700 companies for which it administers plans choose to offer bitcoin as an option for investors starting later this year. Retirement savers can put as much as 20% of their savings into bitcoin, though individual plans can set a lower maximum. Almost no 401(k)s currently offer a digital investment option. That makes Fidelity, which oversees 401(k)s holding more than $2.7 trillion in retirement assets for more than 20 million people, the first big retirement plan provider to open up bitcoin to the ranks of salaried employees.

The Boston-based financial giant will give investors indirect ownership of bitcoin, the best known digital currency, through a “digital assets account” that uses its institutional trading and custody platform. Currently, most investors who buy or sell cryptocurrencies have to set up a digital wallet on a cryptocurrency exchange.

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Douglas Boneparth, a crypto enthusiast and the president of Bona Fide Wealth, a fee-only advisory firm in New York, called Fidelity’s move “a very bullish thing for bitcoin.” The digital currency, now at around $38,000, is down more than 40% since peaking last November at nearly $69,000. 

At the same time, Boneparth said it’s unclear how Fidelity will handle internally the bitcoin it holds for investors. “Is it like a mutual fund?” he asked. “A futures exchange-traded fund? We don’t know how that’s going to work.” 

In its announcement, Fidelity said that a digital assets account in a 401(k) would hold bitcoin and short-term money market investments “to provide the liquidity needed for the account to facilitate daily transactions on behalf of the investor.” Investors will pay management fees ranging from 0.75% to 0.90% of the value of bitcoin they hold, Fidelity spokesman Mike Shamrell said. Fidelity will also levy a not-yet-disclosed trading fee.

Labor unrest
Fidelity’s big move comes just one month after the Labor Department, which regulates company retirement plans, issued a stark warning about cryptocurrencies in 401(k)s, cautioning companies to “exercise extreme care” when deciding whether to include them on plan menus. One issue, the agency said in its March warning, was that plan sponsors are required by law to act as fiduciaries for plan participants and refrain from offering “imprudent investment options.” Calling digital money a “speculative and volatile” investment, it said that retirement plans that move to offer digital currencies “should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks described above.”

U.S. 401(k) plans hold nearly $7.3 trillion, according to the Investment Company Institute. Fidelity thus controls 37% of that market. But its bitcoin move may presage a fight with the Labor Department. 

“Sometimes, being large means you can almost define what’s standard practice,” said Jesse St. Cyr, an employee benefits lawyer at Poyner Spruill in Raleigh, North Carolina. While someone with the resources of Fidelity can fight an audit, he said, “a lot of other plan sponsors and service providers would not be willing to do so.”

Still cautious
Not all big retirement plan providers intend, at least now, to copy Fidelity’s move. 

“Vanguard has no plans to offer a cryptocurrency option within 401(k) plans,” spokeswoman Carolyn Wegemann said. 

A T. Rowe Price spokesman cited “the high level of speculation and lack of regulatory clarity in this space,” adding that ”the mandates we manage for clients today are not well suited for investing directly in digital assets.” Still, the spokesman added, “given the size of digital asset markets, their impact on capital markets cannot be ignored. Our research will continue.” 

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After the Labor Department warning, more than 57% of retirement plan sponsors said they “would never consider cryptocurrency as a viable investment option,” according to a poll by the Plan Sponsor Council of America last month.  Only 1.6% said they would continue pondering the merits of crypto in the wake of the agency’s caution. 

Matt Peterson, the executive director of the National Association of Government Defined Contribution Administrators, a trade group for retirement plans for public-sector employees, said that while some members were interested in offering crypto investments, “it is still new territory, and we encourage extreme caution for anyone deciding to invest their retirement dollars in a bitcoin fund.” 

A spokesperson for Schwab said that while no companies using Schwab's 401(k) platform offer crypto investments on their menus, around 60% of Schwab Retirement Plan Services clients offer a brokerage window in 401(k) plans through which investors can put money into cryptocurrency products.

Fidelity estimates that around 80 million U.S. individual investors currently own or have invested in digital currencies. Varas, who is also a former vice president at Citigroup’s consumer bank for Latin America, said that crypto use tripled last year. Data from Hearts & Wallets shows that nearly one in four U.S. households, or 22%, are now using crypto, either for payments, trading or both, up from 8% in 2020. Nearly four in 10 Gen Z-ers and millennials own crypto. For Gen X, the rate is 27% and for boomers, only 6%. Trading is driving the nearly three-fold increase, a March 24 report by the firm said, as crypto users “cite fear of missing out.”

FOMO is no way to invest, said Varas, who led product management and development for Fidelity’s equity mutual funds in the early 2000s. (She opted to leave after becoming pregnant with her third child.) Fidelity’s move “is not about empowering people to take undue risks with their 401(k)s,” she said. “The workplace is an excellent way to engage younger consumers in responsible investing.”

Financial advisors, particularly independent ones who have a fiduciary duty to put a customer’s interests first and avoid conflicts of interest, have been relatively slow to embrace cryptocurrencies for clients. Only 14% of advisors recommend digital money, according to Cerulli Associates. But eight in 10 are getting questions from clients. 

Nearly one in two advisors, or 45%, said they expected to direct clients to crypto investments “at some point.” Still, only 31% of advisors said they anticipated actually recommending cryptocurrency as an investment in the future.

Varas argued that in a world of online brokerages like Robinhood and investors trading meme stocks like baseball cards, Fidelity could bring seriousness to bitcoin: “This is much more about establishing a platform for investing than about letting people gamble with their 401(k).”