Some 401(k) plans may offer choices
WASHINGTON — Cryptocurrency, an unstable form of virtual money, is the hot new investment craze. But should employers offer bitcoin and its brethren as an option in workplace retirement plans?
ForUsAll, a provider of 401(k) retirement plans, thinks so. It has partnered with Coinbase Institutional, a cryptocurrency platform, to enable employers to offer cryptocurrency in their plans.
“For too long, too many Americans haven’t had the same access to alternative investments that wealthy and professional investors have had,” Jeff Schulte, CEO of ForUsAll, said in a statement.
Under the ForUsAll offering, employees could elect to transfer up to 5% of their retirement balances into a secure account that would allow them to buy, hold and sell more than 50 cryptocurrencies. The company said it will monitor employee allocations and alert them when their overall cryptocurrency allocation exceeds the 5% threshold.
“Professional investors have been shifting more of their investments to alternatives,” the company said.
And right there, that’s the point that shouldn’t be lost to any company considering facilitating this option for their workers. Cryptocurrency investing is best left to professional investors, warn many experts and regulators. Based on my experience with amateur investors, I wholeheartedly agree.
“At the risk of setting off the cryptocurrency enthusiasts, I think this is a terrible idea,” said Christine Benz, director of personal finance for Morningstar. Benz sits on the 401(k) committee at Morningstar. She said that the company hasn’t discussed adding cryptocurrency and that she wouldn’t recommend it at this point.
“We’re not in a rush to add new asset types to our plan,” she said. “We want to make sure that new additions have sufficient history and they’re actually adding something that we’re currently lacking. We also like for the options in our plan to be highly rated by our analyst team, and we don’t currently have any cryptocurrencies or related products under coverage.”
Here are four reasons companies shouldn’t offer cryptocurrency in their 401(k) plans, according to retirement plan experts I interviewed.
No reasonable expectation of profit over time
Although past performance doesn’t guarantee future results, stocks and bonds historically offer realistic growth and cash-flow expectations, said Tim Utecht, chief investment officer for Florida-based Life Planning Partners.
“Crypto fails in that regard,” Utecht said. “Generally, the only potential future cash flow for cryptocurrencies comes from reselling at a higher price, which relies on the ‘greater fool’ theory, or finding someone foolish enough to pay more than you did. That makes it a speculative asset and not an investment.”
Currently, cryptocurrencies lack the proper valuation tools and concepts available to traditional stock market investments, said Daniel Demian, a financial-advice expert at the personal finance app Albert.
“For example, a diligent investor can look at a company’s stock through various lenses, its financial metrics, technical indicators and analyst research reports,” Demian said. “The same data is not currently available for cryptocurrencies beyond coin supply, demand and price patterns.”
Many people don’t get technology
“Very few people can even explain what a cryptocurrency is or why it should have any value whatsoever,” Utecht said. “That doesn’t make for a good investment for a retirement nest egg.”
Bitcoin, the grandfather of digital currency, is basically lines of computer code stored on a computer or held by a third party in a virtual wallet. The value of this cryptocurrency and others like it — such as ethereum — can rise or fall substantially and quickly.
Enthusiasts of cryptocurrency technology believe it will one day revolutionize the way people transact business online. They argue that virtual currencies could give people living in areas without financial institutions or stable currency a safer way to do business. Yet, many investors are just chasing the returns with little to no understanding of how the technology works.
Cryptocurrency is extremely volatile
The price fluctuations of bitcoin and other cryptocurrencies have been brutal of late. On Tuesday, bitcoin fell temporarily below $30,000. It had reached a high of nearly $65,000 in April. Other digital currencies have seen recent selloffs, too. The cryptocurrency based on a meme — dogecoin — fell below 20 cents. It had reached a high of 74 cents in May, according to CoinMarketCap.
“Cryptocurrency investors got hammered Tuesday,” The Washington Post’s Hamza Shaban reported, “with losses wiping out more than $100 billion in market value overnight.”
“We know that choice overload can be a problem with 401(k) investors,” Benz said. “If workers have too many choices and not a lot of financial background, they can get overwhelmed and make suboptimal decisions. So that argues against flooding 401(k) menus with choices, period, never mind that cryptocurrency is a volatile and untested asset.”
Benz said Morningstar data suggests that the more volatile the asset class, the less likely investors are to time their purchases and sales well. Investors frequently buy high and sell low, Benz said.
“If the goal of a 401(k) is to help workers invest their money so that it will grow for their retirements, it makes sense to limit the option to invest in hyper-volatile assets and steer them toward those options where investor outcomes tend to be relatively better,” she said.
Nonprofessional investors shouldn’t speculate
Utecht said companies have to be very careful about opening employees up to speculative assets in workplace plans. Employees investing for retirement shouldn’t be putting a lot of money into this type of holding, because the risks are tremendous, he said.
“While it’s possible for some people to make money by speculating in crypto, just as some have made money in comic books or Beanie Babies, these are not good long-term investments for retirement,” Utecht said.