Fidelity Investments’ recently announced Bitcoin 401(k) plan couldn’t have come at a worse time. The digital currency, touted as a store of value and an inflation hedge, was crushed in the market rout and now stands below $30,000 after starting the year above $47,000.
However, crypto experts say the timing of the launch is the least of their concerns. They say the biggest problems they see with Fidelity’s Bitcoin 401(k) plan lies in two of its key attributes—it offers exposure only to Bitcoin and it allows investors to allocate up to 20% of their accounts to the digital currency.
Retirement and crypto investment experts say both these features are at odds with the fundamentals of investing, alternative assets such as Bitcoin being no exception. For its part, Fidelity has said it sees the Bitcoin product as just the start, aiming to expand to other digital assets.
Here is what investment pros have to say about these aspects of Fidelity’s plan:
Lack of Diversity
Few would disagree that cryptocurrency and blockchain have the potential to be a transformative technology. Various digital currencies—including Bitcoin, Ethereum, Solana, Polkadot, and others—are creating opportunities for technological innovation with many potential applications.
However, the lack of diversification in Fidelity’s plan defies the purported diversification benefit of cryptocurrencies. A crypto portfolio that is 100% Bitcoin or 100% Ethereum, or even a mix of the two, isn’t ideal, says Matt Hougan, chief investment officer at Bitwise Asset Management.
Rather than choosing particular digital assets, he advises the “best approach for most investors looking to make a long-term allocation to crypto is to own a diversified, regularly rebalanced index that will adapt with the evolving market.”
David Ramirez, chief investment officer at 401(k) provider ForUsAll, says diversification is critical to an appropriately balanced retirement portfolio.
“Recognizing that the industry is still developing, we feel it is important to allow participants to invest in a range of cryptocurrencies,” he says, pointing out that ForUsAll provides access to a diverse selection of institutionally adopted cryptocurrencies.
Beyond the singular crypto option Fidelity would offer in its plan, the company’s 20% limit on Bitcoin holdings for its 401(k) customers appears to exceed levels crypto experts say is reasonable. Indeed, most financial advisors would be wary of allocating a large portion of their clients’ retirement savings to any financial instrument with such a risk profile as crypto.
“In the case of a 401(k) plan where the employer has fiduciary responsibilities to the plan participants, 20% is quite high for most investors,” says Adam Bergman, founder and CEO of IRA Financial Group, a retirement plan custodian that allows clients to invest in a range of digital currencies.
That’s not to say he doesn’t believe 401(k) and other retirement savers shouldn’t seek exposure to cryptos. Bergman says that every retirement account holder should own crypto, even if it is worth just $100. “I believe the reward of gaining exposure to an emerging asset far outweighs the risks,” he says. “The question is just how much exposure a retirement investor should have.”
For most retirement savers, he adds, that threshold should be between 1% and 5%.
That is backed up by historical data, according to Hougan. “When you hold more than 5% crypto in a portfolio, it becomes the primary driver of maximum drawdowns in the portfolio and introduces significant behavioral risks,” he says.
At ForUsAll, which was the first platform to offer a crypto option in its 401(k) plans, participants default to an allocation of up to 5%. While Ramirez doesn’t see anything inherently wrong with a higher cap, “we recognize that fiduciaries may have a wide range of views about cryptocurrencies…[and] a modest allocation cap of 5% helps limit risk exposure for participants.” ForUSAll account holders are offered the opportunity to rebalance crypto into more traditional funds to keep the crypto allocation within the threshold, Ramirez says.
Fidelity isn’t new to the world of crypto and blockchain. In 2020, for example, it rolled out a private Bitcoin-only fund available to accredited investors, with a $100,000 minimum investment requirement.
Whether Fidelity’s plan to allow potentially large Bitcoin investments in all accounts is sound, the move reflects the reality that 401(k) investors want crypto access, and that the demand from plan sponsors is real. “Long term, employers will demand that their 401(k) plans offer exposure to crypto because employees will want it,” says Hougan.
For the short term, however, regulatory pushback is why Bergman believes employers may not be so quick to jump on the 401(k)-crypto bandwagon.
The Labor Department, in a March 10 release about crypto options in 401(k) plans, said: “In this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies.”
“I do not believe many major financial institutions and brokerage firms will provide for cryptos as investment options for their 401(k) plan clients,” says Bergman, who adds that sentiment could change if the price of cryptos rebounds and demand for access to cryptos soars again.
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