What to know before you add bitcoin to your 401(k)

WASHINGTON » Fidelity Investments announced that it will allow employers to offer their employees bitcoin in their workplace retirement plans. It was, in many ways, inevitable, but the timing is problematic, as the U.S. economy may be stumbling into some harder times.

Cryptocurrencies are getting a lot of attention, with celebrity hawkers telling folks they are fools to miss out on this next big thing.

Although fewer than 1 in 5

Americans say they own cryptocurrency, a plurality — 43% — say they think cryptocurrencies will become a dominant economic force in the long term, a Quinnipiac University poll found in March.

You have to give people what they want, right?

But what if they aren’t ready for what they want?

Fidelity, one of the largest managers of workplace plans, said employers can allow employee contributions in crypto of up to 20% per payroll cycle and investors can have up to 20% of their total 401(k) account value in a digital assets account. Employers would set the limit for their plans, so they could reduce the percentage.

I’m a skeptic of this speculative investment, even more so given current economic conditions.

In the first quarter of this year, the gross domestic product shrank at an annual rate of 1.4%, according to the Bureau of Economic Analysis. That’s concerning when in the fourth quarter of last year, real GDP increased 6.9%. Coupled with a rise in inflation and the financial fallout from the war in Ukraine, could this be a sign of a recession coming?

The personal saving rate was 6.6% in the first quarter, compared with 7.7% in the fourth quarter. With an end to pandemic-related relief and rising consumer prices, people are having to dip into their savings or save less.

A new poll by Gallup found that 46% of Americans rate their personal finances positively, down from 57% last year. The pessimism is the lowest since 2015. “The current figures are similar to what they were in April 2020 during the early stages of the coronavirus pandemic as well as during the Great Recession in 2008,” wrote Gallup senior editor Jeffrey M. Jones.

The stock market has been turbulent.

“Volatility has surfaced with a vengeance so far in 2022,” Christine Benz, Morningstar’s director of personal finance, wrote in an investing post about the markets.

Cryptocurrencies have taken investors on a journey of spectacular highs and gut-punching

lows. Bitcoin, the granddaddy of crypto, reached a high of close to $69,000 in 2021. In the past week, it’s been trading at about $39,000.

It’s prudent to ask: In uncertain times like now, do we really need more uncertainty by adding cryptocurrency to 401(k) plans?

Here’s the good, the bad and the ugly of allowing unsophisticated investors the ability to invest in a highly speculative asset class within an investment account they need to last through their retirement, which could last 20 to 30 years.

The good: I’ll concede that cryptocurrency has a lot of people, especially young adults, thinking about investing for the future.

The Quinnipiac poll found that 55% of 18-to29-year-olds and 53% of Americans 30 to 49 think cryptocurrencies will become a dominant economic force. Even if they aren’t investing in cryptocurrency, they’re talking about it.

The enthusiasm for creating wealth is encouraging. So, if offering people the ability to invest in crypto boosts overall retirement savings, that’s good.

Fidelity said it wants to “enable employees who are comfortable with the risks and volatility of cryptocurrency to invest in bitcoin.”

Perhaps the strategy is to catch them with the carrot of a trendy thing and then steer the majority of their investment dollars to a diversified portfolio largely made up of stocks and bonds.

There’s also the possibility that as major financial players back cryptocurrency, digital money will take hold and we’ll finally get to see how the technology can improve our lives. It’s possible that virtual currency could reduce the cost of financial transactions. It could give people living in countries without a stable currency a safer way to do business.

The bad: Cryptocurrency isn’t ready for prime time. It’s unregulated. It doesn’t provide protection for consumers. Consumer disclosure rules and regulations are limited or nonexistent.

The Labor Department, trying to get ahead of the interest in digital currency, issued a warning in March to firms marketing investments in cryptocurrencies to 401(k) plans.

“At this early stage in the history of cryptocurrencies … these investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss,” the Labor Department said.

Investors can be impulsive and easily swayed by the hype around an investment product. Because workers still aren’t investing enough for retirement, they can’t afford to become speculators in crypto.

Let’s put some protections in place before we unleash this asset class on workers who may not fully understand how risky this type of investment is right now.

“Cryptocurrencies are very different from typical retirement plan investments, and it can be extraordinarily difficult, even for expert investors, to evaluate these assets and separate the facts from the hype,” the Labor Department said.

I know from experience that many workers have subpar knowledge of how their retirement plans work. Some folks have even asked me how to invest in the stock market when they were already investing within their 401(k).

A report last year from the Government Accountability Office found that 40% of plan participants don’t fully understand fee information and 41% incorrectly believe that they don’t pay any 401(k) plan fees.

Fidelity said it would provide tailored education to help workers make informed decisions.

I mean no disrespect, but from my vast experience working with individuals, I have little confidence that employees will have a full grasp of the blockchain technology behind cryptocurrency.

“Participants are less likely to have sufficient knowledge about these investments, as compared to traditional investments, or to have the technical expertise necessary to make informed decisions about investing in them,” the Labor Department correctly pointed out.

The ugly: In an annual survey of state securities regulators, the North American Securities Administrators Association listed investments tied to cryptocurrencies and digital assets as the top investor threat for 2022. This needs a bit more unpacking.

The Federal Trade Commission says reports to its Consumer Sentinel show scammers are capitalizing on the hyped-up interest around cryptocurrency. Consumers have reported losing more than $80 million to cryptocurrency investment scams, the data shows.

Every step toward normalizing cryptocurrency investing without strong consumer protections makes it that much easier for scammers to victimize investors.

Cryptocurrencies could be the next great technological breakthrough. But right now, there just isn’t a compelling reason to rush this investment option into employer-sponsored retirement plans.