Westend61 | Westend61 | Getty Images
Fidelity Investments offers bitcoin to 401 (k) investors. But before pension savers get access, employers need to give the green light – and it is often much more complicated than it sounds.
Fidelity managed nearly $ 2.9 trillion of 401 (k) and other pension assets in the workplace (representing more than a quarter of the market) by the end of 2020, according to Cerulli Associates, which serves 26 million investors in about 34,000 plans.
The company said Tuesday it would let employers adopt a new Fidelity-developed bitcoin fund (Digital Assets Account) as a primary 401 (k) investment choice along with other core investments such as equity, bond and meal funds. Administrators had not previously allowed this.
MicroStrategy, a listed analytics firm, will be the first company to offer the cryptocurrency investment in its 401 (k) plan sometime this year. Fidelity “also has a lot of discussions” with other employers about adding the bitcoin fund, according to Dave Gray, Fidelity’s head of workplace pension platforms and offers.
Here’s the challenge for companies: They have a strict legal obligation when it comes to selecting and overseeing 401 (k) investments available to workers. This valuation process governs all 401 (k) investments, but most employers are not aware that these duties exist, say financial advisors.
There are many factors to weigh in on employee demand – and making a mistake can mean an investor lawsuit along the way, especially given the volatility of crypto, financial advisers said.
“You’re sponsoring a retirement plan, you’re responsible for the results,” said Ellen Lander, founder of Renaissance Benefit Advisors Group, based in New York. “Yes, the participants make their own decisions, but you have made the decision about what to give them.”
Things to consider
The Employee Retirement Income Security Act of 1974 sets legal standards for employers who sponsor 401 (k) plans. They act as “trustees” who must act cautiously and with a duty of loyalty to plan participants.
A company CEO’s personal beliefs about whether crypto is a “good” or “bad” investment have no bearing on the company’s confidence in investors, advisors said. And employers can not offer an investment solely because employees are crying out for it.
For example, employers need to consider factors such as risk, return, cost and diversification benefits, and whether an investment is in the best interests of the collective workforce, advisors said. They must also continuously monitor these and many other elements.
The U.S. Department of Labor recently sowed doubts about whether plan sponsors can maintain these obligations in relation to investments in cryptocurrency. In a compliance bulletin, the department urged employers to “exercise extreme caution” before offering crypto to workers.
The Department of Labor cites “significant risks,” such as speculation and volatility, to 401 (k) investors; the fund also claims it will examine plans offering crypto and, if necessary, “take appropriate action” to protect investors.
“DOL made it very clear that it is careless,” said Philip Chao, founder and chief investment officer of Experiential Wealth in Cabin John, Maryland, referring to offering crypto in 401 (k) plans.
Fidelity, which worked on its bitcoin fund before the Ministry of Labor released its memo, believes it structured its bitcoin fund in a way that meets the agency’s criticisms.
For example, workers may not choose to allocate more than 20% of their payslip contributions or a total of 401 (k) savings to the bitcoin fund. (Employers can choose a lower ceiling.) Assets are valued daily, just like a typical mutual fund. Fidelity provides educational materials to potential investors. In addition, Fidelity keeps track of the private keys that have confused other retail investors who have lost them, Gray said.
Furthermore, employers – rather than the Department of Labor – are the judges for their 401 (k) investments, Gray added.
“The ultimate decision on whether this digital asset account – or any other investment opportunity – is prudent for a plan belongs to the plan’s sponsor administrator, the employer,” Gray said.
Eleven groups of financial services and business traded sent a letter to the Ministry of Labor on April 12, asking them to withdraw the crypto message. Among other things, the letter said that there is no legal basis for assessing whether any investment is inherently appropriate or inappropriate.
Some 401 (k) savers may already have access to crypto-related funds, such as bitcoin futures exchange traded funds, through a little-used mechanism called a “broker window”. (Contrary to Fidelity’s offerings, these funds buy futures contracts and do not offer direct bitcoin ownership.) The brokerage window expands the universe of funds available to 401 (k) investors, but these funds are not traditionally researched by employers.
Some employers who have developed an investment policy that governs how they make 401 (k) investment choices may be barred from immediately offering a fund like Fidelity’s, Lander said. Many such policies require that funds have existed for at least three years prior to investment.
Employers considering adding a bitcoin fund to their main lineup of choices should also thoroughly document their decision-making process, advisors said.
“If you include crypto, are you then able to document why you did it and all the reasons why you made the decisions to add it?” asked Lander. “If you answer those questions, you have the answers to whether it makes sense.”