Cryptocurrencies have experienced intense growth since Bitcoin launched in 2009—both in market capitalization and public awareness. So it should come as no surprise that many retirement investors are wondering if crypto has a place in their 401(k)s or similar employer-sponsored retirement plans.

The momentum in crypto may be challening for 401(k) plan administrators. With some providers now making it possible to include crypto among investments, plan fiduciaries must decide whether the asset class is a good choice to help peopel save for their retirement nest eggs.

Cryptocurrency Legalities and Regulations

Qualified retirement plans like 401(k)s must meet the minimum standards under the Employee Retirement Income Security Act (ERISA). The law does not specify which assets retirement investors can or cannot include in their 401(k), including cryptocurrencies.

Instead, the federal law imposes fiduciary responsibilities on the people who make decisions about retirement plans. This means that plan administrators, trustees, and the plan’s investment committee members must perform their due diligence and act in the best interest of the plan participants.

It’s up to the people who hold these fiduciary roles to determine whether it’s prudent to make crypto and other digital assets available to plan participants. The regulatory uncertainty surrounding cryptocurrency regulations could make it difficult for plan administrators to grapple with this question. But, there has been little progress on meaningful legislation to clarify the rules related to digital assets.

In March 2022, the U.S. Department of Labor (DOL) issued guidance for retirement plan decision-makers who may consider crypto's place in retirement plans. In a strongly worded Compliance Assistance Release, the DOL advises “plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.”

Advantages and Disadvantages of Cryptocurrencies in 401(k) Plans

Plan administrators and other fiduciaries must weigh the pros and cons of offering participants cryptocurrency as an investment option in their retirement accounts. Let’s consider the potential benefits and risks of providing retirement investors access to cryptocurrency assets in their 401(k)s.

Advantages

Cryptocurrency enthusiasts argue that it has the potential for large returns that would otherwise be impossible with traditional investment types available through 401(k) plans. As such, 401(k) participants who manage to capitalize on an upswing in the crypto market could receive a nice boost toward their retirement goals. Other benefits of adding crypto to retirement plans like a 401(k) include:

• The outperformance of cryptocurrencies when compared to traditional assets like stocks and bonds over the past decade
• Opportunities for growth and flexibility as cryptocurrencies become more accepted and are adopted as investment options for retirement plans

Disadvantages

The DOL's statement highlights numerous concerns about the suitability of crypto as a retirement investment. In addition to risks relating to fraud, theft, and loss, the agency remains concerned that:

• These assets are speculative and volatile in nature of the asset class.
• Plan participants could lack the knowledge they need to make informed decisions about crypto.
• Cryptocurrency investments also present custodial, valuation, and regulatory concerns for those responsible for protecting the interests of plan participants.
  

Adding Cryptocurrencies to a 401(k) Plan

After carefully weighing the risks of offering cryptocurrency assets to retirement investors against the potential rewards, 401(k) plan administrators who decide to move forward have a couple of choices for making digital assets available to participants. Administrators can generally opt to include cryptocurrency within the plan’s core investment options or through a setup similar to a self-directed brokerage window.

Including cryptocurrency on the core investment menu makes these assets available to all participants in the plan. The potential drawback is that ERISA requires plan advisors to verify the suitability of any investments included on the core menu. In other words, if a crypto asset included on a plan’s core menu is determined to be imprudent, then plan fiduciaries are at risk of liability.

The other possibility is offering crypto through a self-directed window—a separate account that participants can open within their retirement plan to access a broader array of assets. Making available a self-directed option allows participants greater freedom to allocate their retirement portfolios, providing access to funds not on the core menu, individual stocks and bonds, and cryptocurrency assets (if they’re available through the 401(k) provider).

Mitigating Crypto Risks and Ensuring Compliance

The DOL advised 401(k) fiduciaries about approaching crypto with "extreme care." Fortunately, there are a few things administrators can do to limit risk and ensure their plan remains compliant with all relevant rules and regulations.

One important measure is to leave the choice of whether to allocate retirement funds to crypto assets entirely up to the plan participants. As such, they should always be available as a plan option, and administrators should steer clear of making riskier assets a required or automatic investment choice. Offering crypto through a self-directed window rather than within the core menu may be one way of clarifying that investing in these assets is not obligatory.

Another way to mitigate risk is to institute limits on the percentage of a participant’s portfolio that can be allocated to cryptocurrency assets. This lets retirement investors benefit from the diversification provided by crypto without exposing an unadvisable portion of their investments to heightened levels of risk.

The choice of plan provider can also be a key factor in ensuring compliance. Plan fiduciaries who wish to offer crypto investments could benefit from working with an experienced provider in making digital assets available to retirement investors. Knowledgeable providers can offer educational materials to help participants make more informed decisions about crypto, and they can work with plan fiduciaries to install the proper guardrails to protect retirement investors against ill-advised or excessively risky allocations.

The Bottom Line

Many investors may be interested in including cryptocurrency assets within their retirement portfolio. Still, retirement plan administrators have the responsibility to tread carefully regarding the investment choices that they make available. Due to the liability administrators inherit when creating plans, they should exercise caution regarding including cryptocurrency in retirement plans and highlight the volatility and other risks associated with the asset class for participants. Plan administrators should carefully weigh these risks before allowing participants to invest in cryptocurrency. Administrators who decide to offer crypto investments can put some safeguards in place, like allocation limits and enhanced educational resources, to reduce risks and remain compliant with regulations.

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