3 Areas of Concern for Cryptocurrencies in 401(k) Plans
Cryptocurrencies are all the rage in investment discussions. With Bitcoin moving 500% in less than a year, it brought virtual currencies into focus. Now that there are many choices and their popularity is widespread, it is natural that some businesses are asking if they should allow cryptocurrencies in their company 401(k) accounts.
There are no specific regulations forbidding them in qualified retirement accounts. ERISA, the Employee Retirement Income Security Act, does not indicate the type of investments. It instructs fiduciaries managing the plans to be prudent and to use care and diligence in managing the assets in the plans. This does not mean that the plan’s IPS, Investment Policy Statement, does in many cases specifically limit the type of assets that can be held in a plan.
- Risks of Cryptocurrencies in 401(k) Plans
When an employer offers a 401(k) plan to employees, the IPS will often limit the investment asset types to stocks, bonds, ETFs, and mutual funds. This is in part due to the risk of adverse actions as a fiduciary if risky asset types are allowed. Inappropriate investment choices can result in poor or even negative plan performance, so crypto currencies can add risk that some employers may find unacceptable. These risks can include:
- Outside the definition of a traditional investment – Even without specifically addressing cryptocurrencies, the IPS can by its language prohibit them without expressly doing so.
- History of dramatic valuation fluctuations – Though most choices are less dramatic due to lower valuation levels, Bitcoin has shown huge losses from day to day in its history.
- Inadequate guidance in the IPS – There should be guidance specific to the uniqueness of cryptocurrencies and their volatility in the IPS.
- Fees associated with offering cryptocurrencies – There are court cases pending relating to employer fiduciary responsibilities when cryptocurrencies have caused plan losses or poor returns due to high fees.
- Reasons to Consider Crypto in a 401(k)
Even with the perceived higher fiduciary risks, there are valid reasons for considering cryptocurrencies in a company sponsored 401(k).
- Availability – The very virtual nature of cryptocurrencies makes them available everywhere independent of political or economic structures. They are not prohibited by ERISA, and recent rulings from the OCC, Office of the Comptroller of the Currency, have made them to be held by national banks.
- Popularity and Employee Quality and Retention – More employees are desirous of investment in virtual currencies and would view it a positive feature of employment at a company that allows them in a 401(k).
- Simplifies Tax Advantages – As this is written, the IRS is exploring getting better control of managing the reporting of trades, losses, and gains. Holding them in a retirement account avoids the need to track the trades in detail.
- Considerations for 401(k) Investment
These are considerations before making the decision to offer cryptocurrencies in a 401(k):
- Make sure that the provider and manager of the 401(k) offers crypto as an investment option.
- Adjust the terms of the IPS to avoid prohibition of cryptocurrencies and to provide guidance in their selection. Be certain that fiduciaries follow the IPS rules for selection and performance of the assets.
- Consider limiting the amount or proportion of crypto in each account.
- Be certain to make clear that investment in cryptocurrencies is optional, not required.
- Provide considerable reliable information materials to employees to assure their understanding of cryptocurrencies and risk/reward profiles.
A business can never go wrong in providing choices to their employees in their current compensation and tax planning.