Fidelity Investments just made a major splash by announcing they will allow trading in Bitcoin in the 401(k) plans they administer starting midyear.
This makes Fidelity the first major plan provider – though almost certainly not the last – to allow trading in Bitcoin. News was scant as to whether other major cryptocurrencies such as Ethereum would eventually be allowed in Fidelity 401(k) accounts. For now, the focus is on Bitcoin.
Fidelity is the largest player in 401(k) plans by a country mile, with more than $2.4 trillion in plan assets. So, the introduction of Bitcoin into a 401(k) is a big deal and opens vast new pools of liquidity to investment in the blue-chip cryptocurrency.
But before you start licking your chops, there are a couple questions to consider.
Will Bitcoin Be Available in My 401(k)?
A 401(k) plan might look like a brokerage account, but they are managed, administered and regulated very differently. Remember: 401(k) plans are the primary savings vehicle for millions of Americans, and as such, the government regulates them not all that differently than it does traditional pension plans.
The Employee Retirement Income Security Act of 1974 (ERISA) sets the rules here, and it requires that the plan have a sponsor, an administrator and a fiduciary. The sponsor creates the plan, the administrator handles the day-to-day management, and the fiduciary ensures that the plan is being run in the best interests of the participants. (Often your employer or a related party will fulfill one or all of these roles).
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None of these are generally Fidelity’s job. Fidelity role is that of a plan provider and custodian. They control the basic infrastructure that makes a 401(k) plan possible. They create accounts for plan participants and handle the buying and selling of investments.
But importantly, Fidelity doesn’t choose what investments are available in your company’s plan. That’s the fiduciary’s job. Fidelity can make Bitcoin available on its platform, but it’s up to your plan fiduciary to decide whether having cryptocurrency in your 401(k) is in the best interest of you and other participants, or whether to offer you other nontraditional investments, for that matter.
Plan fiduciaries tend to be stodgy and conservative. It’s their job to be a sober voice of reason. So, not every fiduciary is going to be in a hurry to make Bitcoin available as part of their 401(k) plans.
Especially not when the government is giving it a leery eye.
"The Department of Labor says it expects to open an investigation of plans that offer participants investments in cryptocurrencies," says Joy Taylor, Editor of the Kiplinger Tax Letter. "It will ask fiduciaries to demonstrate how they met their required duties of prudence and loyalty when choosing a cryptocurrency investment option for plan participants."
Indeed, days following the announcement, a Labor Department official sounded the alarm.
“We have grave concerns with what Fidelity has done,” Ali Khawar, acting assistant secretary of the Employee Benefits Security Administration, told The Wall Street Journal.
In short: If your employer’s plan is held at Fidelity and you want to buy Bitcoin within your 401(k), you might have to give your HR department a little nudge.
And if your employer’s plan is held anywhere other than Fidelity … well, for right now, you’re still out of luck.
Should You Buy Bitcoin in a 401(k)?
“Can” and “should” are two very different things.
Your tax-deferred retirement dollars are precious. Given their ability to compound tax-free over time, a dollar in your 401(k) plan is more valuable than a dollar in a taxable account. You don’t want to be reckless with that particular pool of money.
That said, let’s say that you believe in cryptocurrencies and that you consider Bitcoin an important long-term piece of your asset allocation. Holding that Bitcoin allocation in your 401(k) isn’t a bad idea.
The tax regime surrounding cryptocurrency is still very much a work in progress, and if you’ve ever had to report crypto gains or losses on your tax return, you’re no doubt well aware of how burdensome the recordkeeping can be. If you’re committed to owning Bitcoin, then owning it in a tax-deferred account certainly makes your life easier come tax filing season.
Even then, basic common sense should apply here. Don’t buy more Bitcoin than you should simply because you can. You don’t want to put your retirement at risk in what is still very much a new asset class.
But if you’ve determined a prudent amount to own, then holding Bitcoin within your 401(k) can be a smart way to do it.