Should Crypto Be In Your 401(k)?
Contributor: Jasmin Sethi
Earlier this fall, I was a guest on The Indicator from the Planet Money podcast and was asked whether people should be investing part of their 401(k) in cryptocurrencies. While I do not take an absolute view against crypto in retirement accounts, I expressed concern that this asset class is not being viewed as the subset of alternative investments that it is. You can hear the entire episode here.
When retirement plan fiduciaries choose the asset options available to their plan recipients, diversification is a guiding principle. The usual choices are diversified mutual funds. As my thoughtful co-panelist at Morningstar has stated in our partnership to educate investors about crypto, “At this point, we don’t consider cryptocurrencies a viable investment vehicle using the traditional long-term lens that we apply to investing for concrete goals like retirement, saving for college, things of this nature.” Diversification ensures that if any asset class suffers a decline in value, one’s overall portfolio does not suffer those dramatic losses.
The “Prudent-Man Rule” was enacted as law for 401(k) plans via the Pension Protection Act of 2006 as an amendment to ERISA. Applying the Prudent-Man Rule, investors should keep their investments in alternative asset classes to only a limited percentage, perhaps 10%, of their retirement portfolio, and crypto would be a subset of this asset class. Under such guidance, Fidelity’s allowance of up to 20% in crypto for plans held with them looks too aggressive. Not to say, however, that it may not be appropriate for some people. Remember that one 401(k) does not represent an individual’s total retirement assets; one could have multiple 401(k) and IRA accounts and 20% of one 401(k) account may still be less than 5% of an investor’s total retirement assets. But how is a plan fiduciary to know that and monitor for that? Such verification would take extra steps for plan sponsors that may not be workable from their perspective. Without such steps, the Department of Labor (DoL), as per their recent guidance, may not deem a plan that allows significant crypto investing to be carrying out its fiduciary duty under ERISA.
Crypto presents a number of regulatory risks for investors. These risks make it appropriate to limit its allocation in a retirement account. Even one 401(k) provider who is suing the Department of Labor over its guidance, asserting that the Department has overstepped its authority, has already set its guardrails of allowing investors to only invest up to 5% of their portfolio in crypto.
To avoid 401k protections, investors are being enticed by unregulated entities to rollover their 401(k) assets into IRAs in which they can invest as much crypto as they want. This area is a grey one in terms of regulation and will likely not remain unregulated as the DoL is expected to amend its Fiduciary Rule and related exemptions perhaps even later this year and may speak to the status of such rollover transactions as being covered by the Fiduciary Rule. Such a move would put an end to the rollover into the crypto business.
Whether a given investor should have some retirement savings in crypto is an individual determination, just like any other asset class. For the majority, however, a good rule of thumb is that no more than 5% of one’s total retirement assets should be in crypto, and even there, diversify and obtain regulatory protections if possible.
Jasmin Sethi is the CEO of SCA. SCA educates investors on crypto investing, works with plan sponsors and fiduciaries to determine the best ways to offer crypto to their participants and clients, reviews marketing of crypto materials for compliance, and is partnering with Saifre to develop AI compliance tools to review marketing disclosures.