Cryptocurrency May be Coming to Your 401(k) with Rules Change
The government is adopting a more permissive stance on allowing savers to access cryptocurrency. Your employer may offer crypto in your 401(k). Should you buy?
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The Department of Labor (DOL) just made it easier for employers to add cryptocurrency to 401(k) plans. The agency rescinded a 2022 Biden-era guidance calling on plan sponsors to use "extreme care" when considering crypto investments. That change relieves regulatory pressure on plan sponsors.
The DOL, under the Trump Administration, is scaling back what it says is overreach on the part of government agencies. This move aligns with Trump's strong support for the cryptocurrency industry.
In addition, the Securities and Exchange Commission (SEC), which is tasked with regulating cryptocurrencies, is overhauling its efforts under new SEC Chairman Paul Atkins. Atkins recently argued that cryptomarkets have been “languishing in SEC limbo for years” and vowed to change that.
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In a press release announcing the change, the DOL stated that the 2022 language deviated from the requirements of the Employee Retirement Income Security Act (ERISA) and represented a departure from the agency’s neutral approach to fiduciary investment decisions.
With the cautionary language rescinded, the DOL states that it is taking a neutral stance and neither endorses nor disapproves of plan sponsors including cryptocurrency in plan investment menus.
“The Biden administration’s Department of Labor made a choice to put their thumb on the scale,” said U.S. Secretary of Labor Lori Chavez-DeRemer in the press release. “We’re rolling back this overreach and making it clear that investment decisions should be made by fiduciaries, not DC bureaucrats.”
Cryptocurrency in 401(k) plans: risk abounds
While cryptocurrency has its supporters, including big Wall Street firms such as JPMorgan, Goldman Sachs and Morgan Stanley, providing more access to it via 401(k) plans is fraught with risk. After all, Bitcoin, the leading digital token, is known for its volatility and wild swings up and down.
“With crypto, you can lose it all or make tenfold,” says Denny Artache, president and CEO of Artache Financial Group. That volatility may be fine for people in their 30s and 40s, but if retirement is in the next five or ten years, you can’t afford to lose 50% on a single day.
For investors in their 50s who need their money to last the rest of their lives, Artache advises against investing a lot of money in crypto. If they are in their 30s and 40s and are seeking a speculative, high-risk investment, crypto can give them that, he says.
Eyes wide open
When it comes to adding cryptocurrency to your 401(k) plan, Derrick Longo, a wealth advisor at Exencial Wealth Advisors, says savers have to go into it with their eyes wide open and understand the risk involved with investing in something that is purely speculative. The price moves with market sentiment, which tends to change often.
“This is more of a speculative investment. Are you ok with the movements? Do you understand what bucket Bitcoin falls into? Just because you hear about it a lot in the news doesn’t mean it's suitable to buy,” says Longo. “It has to match up with your risk tolerance.”
There’s also the danger that regular investors will think Bitcoin isn’t that risky if more plan sponsors include it in their 401(k)s, which could set them up for big losses.
As it stands, you have to download an app to purchase Bitcoin. If it's a choice in a 401(k) plan, all you have to do is click a button or fill out a form to get access. “You don’t know how Bitcoin will do long term. You can have somebody just completely time it wrong and destroy their retirement," says Longo.
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