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Cryptocurrency is starting to emerge as an alternative asset class in some 401(k) plans. Retirement savers may wonder if it is wise to invest.
“Making it so easy and accessible has both advantages and disadvantages [for investors],” said Douglas Boneparth, a certified financial planner and founder of Bone Fide Wealth in New York.
Fidelity Investments and ForUsAll, which manage workplace retirement plans, began offering cryptocurrency such as bitcoin to 401(k) investors within the past few months. They seem to be the first companies to do so.
However, that doesn’t mean all 401(k) plans will offer crypto.
Employers must use an administrator who provides access and then choose to make crypto available to workers. Some may hesitate after a US Department of Labor warning this year to exercise “extreme care” before adding crypto alongside more traditional stock and bond funds.
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The regulator identified speculation and volatility, as well as the challenge for 401(k) investors to “make informed investment decisions,” among its primary concerns.
“As volatile as it is, it has the potential for huge rebounds,” said Ivory Johnson, a CFP and founder of Delancey Wealth Management in Washington, referring to cryptocurrency.
Bitcoin, for example, peaked a year ago at nearly $69,000, more than doubling from the start of 2021. Its current price, at around $21,000, has dropped 70% since then; the crypto market overall has lost $2 trillion in value from its peak.
Despite this pullback, bitcoin prices have still nearly tripled since the beginning of 2020.
Crypto’s upside could benefit buy-and-hold investors, especially at a time when many Americans are behind on retirement, said Johnson, a member of CNBC’s Savings Advisor Council. The downside: Most people knee-jerk and sell short-term, he added.
Unlike holding crypto in a taxable investment account, crypto returns don’t incur capital gains taxes if and when investors sell their 401(k) crypto holdings, Johnson said.
But crypto’s upside also involves greater risk.
“You can be wrong,” Johnson added of a speculative bet in crypto. “People make decisions based on Twitter, they hear something compelling…and they go all in and put 30% of their retirement money into bitcoin.
“You have [potentially] made a bad situation exponentially worse,” he said.
How to choose a crypto allocation
Financial advisors advise investors to allocate only a small portion of their portfolio – generally no more than 5% – to crypto.
Investors with savings outside of their 401(k) plan should consider their crypto allocation as part of their overall investable net worth, said Boneparth, also a member of CNBC’s Advisory Council.
For example, someone with $50,000 in a 401(k) plan and $100,000 in a separate taxable brokerage account would generally allocate up to 5% of that $150,000 total to cryptocurrency, he said.
A young investor in their 20s might be well suited to a 5% allocation, while someone in their 50s who is closer to retirement age should probably taper that exposure, Johnson said.
Investors may need to rebalance their allocations over time as crypto outperforms or lags returns elsewhere in their portfolios.
“The investment rules don’t go away just because there’s a digital asset to invest in your account,” Boneparth said. “Risk and reward, that relationship never goes away.”
Fidelity and ForUsAll have implemented some safeguards to try to limit exposure.
For example, Fidelity prohibits investors from putting more than 20% of their 401(k) savings into their Digital Asset Account, although employers can choose to reduce this cap. The account holds bitcoin and short-term, cash-like investments to help facilitate day-to-day transactions.
ForUsAll limits allocations to 5%. It offers six cryptocurrencies – bitcoin, ethereum, solana, polkadot, cardano and USDC – and intends to add more soon. Within the 50 or so pension plans that have made crypto available, 12.5% of investors invest and allocate an average of 4% of their portfolio to crypto.
“Being at 0% [of your portfolio]you’re probably going to be 100% wrong,” Ric Edelman, founder of the Digital Assets Council of Financial Professionals, said in September at the Future Proof wealth festival in Huntington Beach, California.
He also advised investors against putting a significant portion of their portfolio in cryptocurrency.
Investors shouldn’t jump blindly into crypto just because it’s available, financial advisers said. As with any investment, they should generally understand what they are buying.
The Department of Labor warned that employers may be sending the opposite message to investors by adding crypto alongside traditional funds.
When employers offer crypto in a 401(k), they “effectively tell plan participants that knowledgeable investment professionals have endorsed the cryptocurrency option as a prudent option for plan participants,” the agency wrote. “This can easily lead plan participants astray and cause losses.”
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Investors who choose to save some retirement money in cryptocurrency are also probably best off sticking with bitcoin and ethereum, at least for now, advisers said. These are the biggest cryptocurrencies, and it’s “exponentially harder” to speculate on anything else, Boneparth said.
“I think you’re going to see more and more that bitcoin becomes a risky asset like stocks,” he said.
“We see it maturing,” he added. “There are a lot of question marks left.”