Know the risks before adding bitcoin to your 401(k)

Fidelity is adding bitcoin to its 401(k) plans, but your employer will have to opt in. Even if they do, make sure you understand the risks before you start rolling cryptocurrency into your retirement plan.

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Brian ActonContributing WriterBrian Acton is a contributing writer at Policygenius, where he covers insurance and finance. His work has also appeared in The Wall Street Journal, TIME, USA Today, MarketWatch, Inc. Magazine, and HuffPost. 

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Fidelity Investments, one of the nation’s biggest retirement plan providers, announced it will introduce bitcoin as a 401(k) investment option for plan participants later this year. This marks the first time a major financial plan provider has included cryptocurrency in a 401(k) plan.   

But in March, the Department of Labor preemptively cautioned providers against adding cryptocurrency to 401(k)s, warning that investor enthusiasm for bitcoin could overshadow legitimate concerns about volatility and risk. 

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If your employer decides to allow bitcoin in your 401(k), make sure you understand the risks before you start putting part of your paycheck into cryptocurrency. 

How Fidelity’s 401(k) bitcoin option will work

Later this year, Fidelity will allow its 23,000 employer clients to offer their workers bitcoin as an investment option for 401(k)s. Employees can put up to 20% of their payroll contributions toward bitcoin, and also transfer funds from other investments. Up to 20% of the entire plan can be held in a “digital assets account,” a custom plan account that contains bitcoin. It’s up to your employer whether to allow this option, and if it does it can choose to set a cap lower than 20%. 

“Your employer must allow it to be an option within your 401(k). I’m guessing that many employers won’t provide bitcoin as an option in their 401(k) plans given the uncertainty around how the Department of Labor will regulate it,” says Drew Feutz, certified financial planner and co-founder of Migration Wealth Management

Investors without previous exposure to bitcoin will be able to purchase it without having to sign up on a cryptocurrency marketplace. It will be treated like any other choice on your investment menu, and the tax benefits that apply to other 401(k) investments will also apply to bitcoin. 

The Department of Labor warns against risks

Of course, there is inherent risk with any investment. But in March the Department of Labor warned plan fiduciaries to “exercise extreme care” before adding cryptocurrency to 401(k)s for several reasons. 

First, the DOL says cryptocurrency investments are highly speculative and volatile, making it difficult to assess their value, a problem for long-term investment strategies. To compound this problem, plan participants are less likely to understand cryptocurrency compared to traditional investments, and may be blinded from the risks by the temptation of significant gains.

Cryptocurrencies also have a high risk of loss due to hacks, theft, and even lost passwords, says the DOL. Some market participants may not be following the proper rules and regulations, and may fall out of compliance as those rules evolve. Lastly, the agency says it will investigate plans that offer cryptocurrency investments, question plan fiduciaries sworn to act in the best financial interests of plan participants, and “take appropriate action” to protect those interests. 

“Historically, bitcoin has seen huge price increases followed by rapid crashes. This could lead people to make rash, short-term decisions,” Feutz says. Because bitcoin is not an income-producing asset, its value increases and decreases are based on factors outside of the income it produces or the outlook of a business, which makes it difficult to predict, he says. 

For what it’s worth, Fidelity itself acknowledges that digital assets are speculative and volatile in its own statement, and are only for investors who can live with high risk. 

Should you invest your 401(k) in bitcoin?

On the upside, investing in bitcoin via your 401(k) could be a way for you to get familiar with cryptocurrency through an established financial services company like Fidelity. In addition, it has the potential for higher returns than even some higher-risk traditional securities. But even if your employer allows it (and many may be wary), make sure you understand the risks before you get started. 

“People should understand that the asset is very volatile” and be prepared for large fluctuations, Feutz says. “Someone considering cryptocurrency for their 401(k) who has never invested in bitcoin … should consider dipping their toe in rather than jumping in the deep end.”

Cryptocurrency doesn’t have the decades of data behind it that other investments do. That said, it’s likely not going anywhere anytime soon, and financial advisers, plan administrators, and fiduciaries may become more comfortable helping clients invest as time goes on and the regulatory landscape clarifies. 

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