Bitcoin has been one of the hottest financial topics of discussion lately. The skyrocketing value enticed curious investors to look into the cryptocurrency and spurred people to ask about adding bitcoin to their 401(k)s or other retirement savings plans. The interest has somewhat dampened since the precipitous drop in January 2018, but the questions still linger.
The currency, and the multitude of other cryptocurrencies that have sprung up, relies on blockchain technology, a computerized ledger system that processes transactions (completed blocks) via secured wallets and keys.
The three biggest differences between cryptocurrencies and traditional government-issued currency are:
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
- Cryptocurrencies are digital and stored on a blockchain.
- Cryptocurrencies have zero government oversight.
- Bitcoin supply is limited or defined based on mining, unlike government-issued currency, which governments can print more of or shrink supply based on demand.
If you are not mining bitcoin, the purchase process is similar to valuing and purchasing art, which is one of the reasons the government treats bitcoin as property for tax purposes. The value of cryptocurrency is pure supply and demand and is based on an individual transaction at an exchange with your standard currency. With bitcoin, exchanges at any given moment in time can vary greatly.
Issues for 401(k) sponsors and participants.
How can a plan offer bitcoin to their participants? Currently, no mutual fund, collective investment fund or ETF in the United States has a fund exclusively invested in bitcoin or cryptocurrency.
Since a vast majority of 401(k) plans use these types of funds to trade daily for participants, bitcoin will not be a mainstream investment option. It is possible to purchase bitcoin futures on certain exchanges, however these can only be accessed by brokerage accounts that permit purchases in these exchanges.
Many plan sponsors that offer brokerage accounts restrict purchases to mainstream investments, such as mutual funds, ETFs and the major stock exchanges. Taking this down a different road, bitcoin owners store and track the bitcoin in wallets. A plan sponsor generally holds one position of each security on behalf of all participants. That means someone must hold the password for the wallet, which could be the plan sponsor or their selected recordkeeping service provider.
Think about the difficulties of trading between a mutual fund and a bitcoin wallet. There is no market close on bitcoin like there is with mutual funds, nor is there one recognized price or trading price.
The fiduciary element.
However, the greater consideration for plan fiduciaries is they must act as in the best interest of plan participants. The question a fiduciary must ask: Do they want to permit investments that are not regulated in any way, shape or form by any government? One can argue the futures exchange is regulated, it is, but the underlying investment is not.
Here’s another way to look at this from a fiduciary perspective. Traditional investments, such as bank or money market accounts, have protections by the FDIC. Investments in brokerage accounts or mutual funds whereby assets go missing are protected by the Securities Investor Protection Corp. (SIPC). Both the FDIC and SIPC have maximum protection per investor (the investor in a 401(k) plan is the plan, not the participant).
Bitcoin has zero protection for the investor in the event of fraud or a heist of your wallet. In addition, your bitcoin wallet has one password that is super long, and there is no password reset. If that password is ever lost, your bitcoin is lost! This is wide open for fraud at the 401(k) level, as to who should hold the password for the plan.
Taking it a step further, what if plan sponsors permitted each participant to have their own wallet and then they lost their wallet? In a litigious society, you know where this is going. An estimated 25% of bitcoins that were in circulation — $18 billion in value — are unrecoverable because of lost keys or wallets.
As fiduciaries, plan sponsors will be reluctant to offer a cryptocurrency as an investment option because of the volatility, lack of risk analysis, lack of government oversight and the hassle factor involved in administration.
Bitcoin is available for investment with your monies outside of a company plan. For example, you can already access it through a self-directed IRA, which could be a good option as it encourages investors to do this outside their 401(k) with IRA or after-tax monies. Since sponsors of 401(k) plans face potential litigation from participants related to their fiduciary responsibility, you will most likely not see bitcoin as an investment option until there is government oversight and efficient trading platforms within a 401(k) plan.
-
Tariffs Could Make Your Holiday Shopping Pricier in 2025Tax Policy Trump’s tariffs would drive prices of clothes, toys, and furniture higher, according to a new study.
-
NYC Congestion Pricing: Ghost Tax or Necessary Fee?State Taxes Drivers headed to Manhattan’s downtown district will face a new $9 toll in January.
-
To Future-Proof Retirement Security, We Need Better StrategiesWith retirees living longer and the inequalities that affect women and people of color, the retirement system needs some optimization. Here’s what would help.
-
Here's Why We All Win When Charitable Dollars Go to WomenGiving to charities for women and girls not only has a lasting impact on their lives — it also benefits society as a whole. Here’s how to start investing.
-
For a More Secure Retirement, Build in Some 'Safe Money'To solidify your retirement plan, write it down, reduce your market risk and allocate more safe money into your plan for income.
-
Five Steps to a Mindfully Fearless CareerIf, like many women, you're struggling with imposter syndrome, try developing an athlete's winning mindset. It's as simple as facing one small fear every day.
-
Six Ways to Optimize Your Charitable Giving Before Year-EndAs 2024 winds down, right now is the time to look at how you plan to handle your charitable giving. The sooner you start, the more tax-efficient you can be.
-
How Preferred Stocks Can Boost Your Retirement PortfolioHigher yields, priority on dividend payments and the potential for capital appreciation are just three reasons to consider investing in preferred stocks.
-
Structured Settlement Annuity vs Lump-Sum Payout: Which Is Better?As the use of structured settlement annuities grows, it can be tough to decide whether to take the lump sum to invest or opt instead for guaranteed payments.
-
What to Do as Soon as Your Divorce Is FinalDon't delay — getting these tasks accomplished as soon as possible can help you avoid costly consequences.
