Investors could soon have the opportunity to include cryptocurrencies in their 401(k) accounts.
In April 2022, Fidelity Investments revealed its plans to enable investors to include cryptocurrencies like bitcoin in their 401(k) retirement accounts, thus becoming the inaugural provider to offer this service. Starting in the middle of the year, this opportunity will be accessible to the 23,000 companies using Fidelity for their retirement accounts, pending approval from employers acting as plan sponsors.
There may be investors who are uncertain about including cryptocurrencies in their retirement savings. Numerous financial advisors suggest that it can be a component of a diversified investment portfolio. They have observed that clients have already started incorporating it into their non-employer-sponsored retirement investments.
“I think most retail investors are looking for exposure to something that just gives them the opportunity to participate in what they hope will be the appreciation of bitcoin over the long-term,” said Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth in New York. “And if this account accomplishes that, I’m elated to see that, I think it’s wonderful.”
What to consider before investing
Investors should not hastily include bitcoin or other crypto assets in their 401(k) plans solely due to the possibility.
Ensure that before adding it to your retirement account, it aligns with your long-term financial objectives.
Ivory Johnson, a CFP and founder of Delancey Wealth Management in Washington, D.C., suggests that if you have a 10-year time horizon, now would be a suitable time to make the purchase. However, for investors with a different time horizon, he advises adopting a comprehensive approach towards the asset class instead of attempting to predict a volatile market.
According to him, investors need to have a specific justification for purchasing cryptocurrency rather than getting influenced solely by price fluctuations. Justifications may involve perceiving the asset as a means of preserving value, considering it to be unrelated to other investments, or desiring ownership due to its growing adoption.
Johnson advised that individuals should be aware of the percentage of their entire investment portfolio that is dedicated to cryptocurrencies and ensure that this allocation aligns with their risk tolerance before diving in. It is essential for new investors to have a clear understanding of the amount they are willing to potentially lose before making any purchases.
“If you put 20% in crypto and you can’t stomach volatility, you’ve got what’s known as a problem,” he said. “But if you’ve gone 1% or 2% or 3%, it’s not as big of a hit to your portfolio.”
Fidelity has implemented certain precautions to prevent investors from allocating their entire retirement investments into cryptocurrencies. The company’s plans allow account holders to invest a maximum of 20% of their savings in bitcoin, with the flexibility for plan sponsors to decrease this limit.
Cryptocurrency Concerns: Why We’re Working to Protect Retirement Savings from Volatile Digital Investments
The retirement savings of American workers and their families symbolize years of effort and selflessness. The funds kept in retirement accounts, like 401(k) plans, are vital for ensuring financial stability in old age – including covering living costs, medical expenses, and more. Consequently, it is imperative to safeguard these assets, which is why plan fiduciaries, including sponsors and managers, are legally responsible according to the Employee Retirement Income Security Act for protecting retirement savings. These fiduciaries must prioritize the financial interests of plan participants and maintain a strict level of care when handling their retirement investments.
There has been an emergence of financial services firms promoting cryptocurrencies as potential investment choices for 401(k) participants. Nevertheless, due to the nascent nature of cryptocurrencies, the U.S. Department of Labor expresses significant apprehensions regarding plans that offer direct investments in cryptocurrencies or associated products like NFTs, coins, and crypto assets to their participants.
President Biden’s new executive order emphasizes the potential financial hazards that digital assets can impose on consumers, investors, and businesses when adequate safeguards are absent. Although cryptocurrency has become widely known and talked about, the future trajectory of the market remains uncertain, and there is limited consensus on investment principles pertaining to cryptocurrency.
Retirement savings can be exposed to significant risks due to cryptocurrencies, which include:
- Valuation concerns . Financial experts have fundamental disagreements and concerns about how to value cryptocurrencies. These concerns are compounded by the fact that cryptocurrencies are not typically subject to the same reporting and data integrity requirements that apply to more traditional investment products. Scammers have used misleading information to inflate the price of cryptocurrencies, and then sold their own holdings for a profit before the value of the currency drops.
- Obstacles to making informed decisions . These investments can easily attract investments from inexperienced plan participants with expectations of high returns and little appreciation of the risks the investments pose. It can be very hard for ordinary investors to separate fact from hype. W hen fiduciaries include a cryptocurrency option on a 401(k) plan menu, it signals to participants that knowledgeable investment experts have approved it as a prudent option. This can mislead participants about the risks and cause big losses.
- Prices can change quickly and dramatically. Cryptocurrencies’ prices have been extremely volatile. For example, in just one day last December, the price of bitcoin dropped by more than 17 percent. These large swings can leave participants vulnerable to significant losses.
- Evolving regulatory landscape . Laws and rules are swiftly evolving. For example, the president’s recent executive order directs federal agencies to study risks and policy approaches to digital assets, including cryptocurrency. Changes in the United States and globally may impact existing regulatory frameworks.
In response to these concerns, the department has released a compliance assistance release that specifically addresses plan fiduciaries’ investment in cryptocurrencies within 401(k) plans. The release advises plan fiduciaries to exercise caution before including a cryptocurrency option in the investment choices for plan participants. We are actively observing the situation and maintaining our dedication to safeguarding the financial security of American workers and their families.
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