Fidelity Investments’ recently announced Bitcoin 401(k) plan could not have come at a worse time. The digital currency, promoted as a store of value and a hedge against inflation, has been crushed in a market defeat and is now below $30,000 after starting the year above $47,000.
However, crypto experts say the timing of the launch is the least of their concerns. They say the biggest problems they see with Fidelity’s Bitcoin 401(k) plan lie in two of its main features – it only exposes Bitcoin and allows investors to allocate up to 20% of their accounts to digital currency.
Retirement and crypto investment experts say these two features go against the fundamentals of investing, and alternative assets like bitcoin are no exception. For its part, Fidelity said it sees the Bitcoin product as just the beginning, aiming to expand into other digital assets.
Here’s what investment professionals say about these aspects of the Fidelity plan:
lack of diversity
Few would agree that cryptocurrency and blockchain have the potential to be a transformative technology. Various digital currencies – including Bitcoin, Ethereum, Solana, Polkadot and others – create opportunities for technological innovation with many potential applications.
However, the The lack of diversification in the Fidelity scheme challenges the purported benefit of cryptocurrency diversification. Matt Hogan, chief investment officer at Bitwise Asset Management, says a cryptocurrency portfolio made up of 100% Bitcoin or 100% Ethereum, or even a combination of the two, isn’t ideal.
Rather than picking specific digital assets, he advises, “The best approach for most investors looking to allocate a long-term cryptocurrency is to have a diversified, regularly balanced index that adapts to the evolving market.”
David Ramirez, chief investment officer at 401(k) Provider ForUsAll, says diversification is critical to an appropriately balanced retirement portfolio.
“Recognizing that the industry is still developing, we feel it is important to allow participants to invest in a range of cryptocurrencies,” he says, noting that ForUsAll provides access to a variety of institutionally approved cryptocurrencies.
Combined with the individual crypto option that Fidelity will offer in its plan, the company’s 20% limit on Bitcoin holdings for its 401(k) customers appears to be exceeding levels that crypto experts say is reasonable. In fact, most financial advisors would be wary of allocating a significant portion of their clients’ retirement savings to any financial instrument with a risk profile such as crypto.
“In the case of a 401(k) plan where the employer has fiduciary responsibilities to plan participants, the 20% is too high for most investors,” says Adam Bergman, founder and CEO of IRA Financial Group, a retirement plan trustee that allows clients to invest in A set of digital currencies.
This does not mean that he does not believe that 401(k) and other retirement savings should not seek exposure to cryptocurrency. Bergman says every retirement account holder should own a cryptocurrency, even if it’s only $100. “I think the reward of gaining exposure to an emerging asset far outweighs the risks,” he says. “The question is just how much exposure a retired investor should have.”
For most retired savers, he adds, this threshold should be between 1% and 5%.
According to Hogan, this is supported by historical data. “When you hold more than 5% of the cryptocurrency in the wallet, it becomes the primary driver of maximum drawdowns in the wallet and leads to significant behavioral risk,” he says..
At ForUsAll, which was the first platform to offer a crypto option in its 401(k) plans, participants defaulted to allocating up to 5%. While Ramirez sees nothing inherently wrong with setting a higher cap, “we recognize that trustees may have a wide range of views on cryptocurrencies…[and] Setting a modest 5% cap helps limit participants’ exposure.” Ramirez says ForUSAll account holders have the opportunity to rebalance their cryptocurrency to more traditional funds to keep their crypto allocation to a minimum.
Fidelity is not new in the world of crypto and blockchain. In 2020, for example, it launched a private bitcoin-only fund available to accredited investors, with a minimum investment requirement of $100,000.
Whether Fidelity’s plan to allow potentially large Bitcoin investments in all accounts is sound, the move reflects the fact that 401(k) investors want access to crypto, and the demand from sponsors of the plan is real. “In the long term, employers will require that their 401(k) plans offer exposure to cryptocurrency because employees will want it,” Hogan says.
However, in the short term, the regulatory rejection is the reason why Bergman believes that employers may not be quick to jump on the 401(k) crypto bandwagon.
The Department of Labor, in its March 10 issue about crypto options in 401(k) plans, said: “At this early stage in the history of cryptocurrency, the Department has serious concerns about the wisdom of the agent’s decision to expose 401(k) plan participants to direct their crypto investment. cryptocurrency or other products whose value is linked to cryptocurrencies.”
“I don’t think many major financial institutions and brokerages will offer cryptocurrency as an investment option to their 401(k) clients,” says Bergman, adding that sentiment could change if the price of cryptocurrencies rebounds and demand for access to crypto soars again.
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