Can Digital Assets Become Part of Americans’ Retirement Savings?


On March 11, the United States Department of Labor warned employers who sponsor 401(k) plans to “exercise extreme caution” when dealing with cryptocurrencies and other digital assets, and even threatened to give special legal scrutiny to retirement plans with significant crypto investments.

His rationale is well known to every crypto investor: aside from the risk of fraud, digital assets are prone to volatility and therefore can pose a risk to American workers’ retirement plans. On the other hand, we see established players in the fixed income market making moves towards crypto. For one thing, the retirement savings platform ForUsAll decided to do it last year Implement crypto as an investment option for 401(k) fixed deposit accounts in partnership with Coinbase. Is this the start of a bigger trend?

Why even bother?

Aside from the simplistic statement that digital assets have the magical ability to make people extremely rich in a short amount of time, there are two serious points to note about crypto and retirement investing.

The first is investment diversification. At least for now, cryptocurrencies, non-fungible tokens (NFTs), and other digital assets possess relative autonomy from the larger traditional financial market. In some cases, this could make them relatively stable when stock markets and other traditional markets are in turmoil.

A second, perhaps more pragmatic, point is that buying and trading crypto through a retirement plan does not require you to pay the same amount of taxes. This is a matter of both profit and time — every time an American investor makes money selling cryptocurrency, they must record it to report to the Internal Revenue Service. Retirement accounts are usually exempt from this charge. As Dale Werts, partner at law firm Lathrop GPM, explained to Cointelegraph:

“Trading crypto within a qualifying plan would be treated like any other asset transaction in a plan, so the same tax benefits would apply. Normally, capital transfers within a plan are not taxed — that’s the whole point of a qualifying plan. Any profits you make can be withheld tax-free until you make a distribution.”

What the law says: 401(k)s, ERISA and IRAs

With 401(k) investments subject to the Employee Retirement Income Security Act (ERISA) of 1974, it’s little wonder that digital currencies fall into a legal gray area when they’re part of a retirement investment portfolio. ERISA does not specify which asset classes may or may not be included in a 401(k). In a slightly dated way Committed Trustees to “show the care, skill, prudence and care that a prudent person would exercise” when handling retirees’ hard-earned money.

Nevertheless, the vast majority of employers prefer not to break the spirit of the law; As such, there are currently few opportunities to invest directly in crypto via 401(k) plans. As Christy Bieber, a contributing analyst at investment advisory firm The Motley Fool, noted to Cointelegraph:

“Those using a 401(k) to invest for retirement will generally not have the option to buy cryptocurrencies when investing for their later years. That’s because 401(k) accounts typically limit you to a small selection of mutual funds or exchange-traded funds.”

A common solution for those who still want to make crypto part of their retirement savings is self-administering individual retirement accounts (IRAs), where the choice of which assets to allocate is usually open.

The Retirement Industry Trust Association has estimated that between 3% and 5% of all IRAs are invested in alternative assets such as cryptocurrencies. According to various surveys between 49% and 54% of millennials are invested in cryptocurrencies or NFTs and/or consider them part of their retirement savings strategy.

Werts, who includes crypto in his personal investment strategy for retirement, said that while the Department of Labor has highlighted crypto’s general risks and challenges, it in no way prohibits ERISA digital assets as an investment option in a 401(k) plan. He sees three main options for those interested in crypto as a retirement plan:

  1. “You can (if available from your employer) use a self-directed 401(k) to invest in alternative assets such as cryptocurrencies. A simple Google search reveals at least one alternative to ForUsAll: BitWage. Many firms are also working on ETFs (like Vanguard and SkyBridge Capital), although the Securities and Exchange Commission hasn’t approved any yet. There are Bitcoin futures investment options that have been approved by the Commodity Futures Trading Commission.”
  2. “You can invest in a long list of public companies that own crypto, such as MicroStrategy, Tesla, Coinbase, Block, PayPal, Marathon Digital Holdings, and Nvidia. I did it. Of course, these companies have different business goals, so you need to be ‘on board’ with those goals.”
  3. “You can invest in trusts like Grayscale Investments’ Bitcoin Trust and Ether Trust (both of which I’ve invested in) through your 401(k) plan. It’s simple, and they’re like mutual funds or money market funds — you buy a “unit” of a trust that’s fully liquid, not a fractional interest in a particular cryptocurrency.”

From 2% to 5%

Regulatory obstacles aside, the main argument against crypto in retirement plans is still purely economic. Experts generally recommend that crypto accounts for no more than 5% of one’s retirement investment portfolio in the United States due to its volatility and unclear regulatory outlook.

Bitcoin (Bitcoin) is the perfect example of this volatility as the #1 currency has lost about 30% of its market value since November 2021 and at one point had fallen almost 50%. This has nothing to do with the conservative dynamic of the S&P 500: the index showed a steady average annual return of 13.6% between 2010 and 2020.

“Five percent might be the right amount for some investors, but it depends on your individual risk appetite as well as your retirement schedule,” Bieber said, noting that the risk of losing all of your crypto assets compares investing in an S&P 500 fund is still much higher. And the 5% mark is a better fit for younger investors, while older adults who will soon need to withdraw from their accounts may want to keep their crypto allocation at 2% or less. Bieber added:

“Ultimately, because of the high level of risk cryptocurrencies pose, don’t invest more of your retirement money in them than you can afford to lose. If you invested 5% of your retirement money in digital currencies, you’d end up with a nest egg that doesn’t provide a decent income should you use far less of your money — or nothing at all — on this riskier investment.”

What’s next?

Can crypto find broader adoption among fixed income investors, at least on a limited scale? Bieber believes the scenario is possible if cryptocurrencies continue to gain mainstream acceptance among institutional investors, which would both propel their adoption into the most conservative corners of the financial market and make them less volatile in a somewhat virtuous cycle. She commented:

“It’s possible that if the SEC regularly allows ETFs or mutual funds to buy cryptocurrencies directly, more funds dedicated to this asset class could be created. And some might eventually be offered in 401(k)s. […] If cryptocurrencies continue to gain mainstream acceptance and there are many ETFs or mutual funds offering exposure to them, target date funds and robo-advisors could also start adding these funds to the portfolios they build.”

There is no shortage of interest in crypto, but future steady demand hinges on a simple, accessible infrastructure that retirees would benefit from. This means US regulators need to update almost 50-year-old pension legislation. In this context, the latest warning from the Labor Department looks like a band-aid and tells us more about the uncertain present than the future – and retirement plans are all about certainty.

This article does not contain any investment advice or recommendation. Every investment and trading move involves risk and readers should do their own research when making a decision. Can Digital Assets Become Part of Americans’ Retirement Savings?

Fry Electronics Team

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