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Should You Hold Bitcoin in Your 401K Plan?


According to Forbes, Fidelity made history when it announced that it would offer participants in employer-sponsored 401(k) plans a chance to invest in bitcoins. The news was not well received despite Fidelity not being the first company to offer bitcoin. In June 2021, ForUsAll, a small 401k provider, announced its partnership with Coinbase, a cryptocurrency exchange platform. The collaboration allows employees to invest up to 5% of their 401(k) investments in cryptocurrencies. Yet, Fidelity’s plan had the U.S. Labor Department voicing its grave concerns, reasoning that the major retirement plan provider manages accounts for 23,000 companies, and cryptocurrency needs a little more time to mature before placing it in a retirement savings account. That concern makes you wonder whether you should hold bitcoin in your 401(k) plan. So, let’s tell you about the implications.

The Implications of Owning a Bitcoin 401K Plan

The United States Congress designed 401(k) plans to encourage Americans to save for retirement. This employer-sponsored arrangement allows an employee to agree to a certain percentage of pre-tax income to be deposited into an account. The money is invested in a vehicle of an employee’s choosing. The most common investment options are mutual bonds, stocks, and bonds. Although there are many benefits to having a 401(k) plan, having a retirement service provider allowing bitcoin to your plan has certain implications. Marca explains that having bitcoin in your retirement benefit plan is not ideal because it lacks the diversification required to minimize losses. The Department of Labor warned that cryptocurrencies pose significant challenges and risks such as theft, fraud, and financial loss to 401(k) investors.

The government explained that regulation might change abruptly as the Biden administration issued an executive order requiring the examination of benefits and risks associated with cryptocurrency There is also the risk of dealing with digital assets challenges such as forgetting passwords and losing the asset forever. Many people have been locked out of their fortunes due to lost or forgotten keys since you only get ten attempts, after which your digital wallet is encrypted forever. Of course, seeing that 401(k) is a retirement saving plan, the risk of senile investors locking themselves out is real. While some platforms will encourage you to invest with bitcoin because of the reward of high-interest rates, you should be cautious. In a traditional savings account, you are guaranteed that if a bank is bankrupt, you will still be protected. A cryptocurrency interest account will lend out your investment to other borrowers who may default, resulting in financial losses.

Should You Have Bitcoin in Your 401(k) Plan?

According to Kiplinger, the government regulates such retirement plans through the Employee Retirement Income Security Act. One of the requirements for having a 401(k) is that the plan must have a fiduciary, sponsor, and administrator. Therefore, the retirement service provider's role is only to provide the plan. A fiduciary’s responsibility is to diversify the investment to minimize large losses since s/he owes a duty of care to the plan participant. For this reason, even if bitcoin is among the investment options by the retirement service provider, it is not automatic that it will be included in your plan. If your fiduciary is considering having bitcoin on your 401(k) plan, the Department of Labor will ensure that the fiduciary has sufficient proof of prudence. While the government’s concerns should have you wary of having bitcoin in your 401(k), there is also evidence of the volatility of bitcoin. The hype surrounding bitcoin and other cryptocurrencies is not enough to warrant you to rush and have it as an investment option on your retirement plan.

According to Time, bitcoin experiences the same volatility as stocks. Within days it went from $43,000 to $38,000 although some speculate that it will rise in value, an observation that could fuel investors to put their money in the cryptocurrency. What most will fail to see is that in November 2021, it reached an all-time high of $68,000 so the fact that it is now nearly half that in less than six months should be a clear indicator of how risky it is to have it as your fall back plan in your old age. Prudent investors know that bitcoin has not been around long enough to have a clear trend that sheds light on if it is a worthy investment. Besides, some experts believe that, unlike stocks and bonds that represent ownership of assets and generate cash flows bitcoin does not. You cannot tell the true value of bitcoin because only the supply and demand will determine how much it is worth at a certain point in time. Therefore, Jamie Cox, a managing partner at Harris Financial Group, referred to bitcoin as a fiduciary lawsuit waiting to happen because adding speculative assets to a retirement benefit plan is illogical.

Steps to Buying Bitcoin for Your 401(K) Plan

If you are still convinced that despite the warnings of having bitcoin in your 401(k), you should give it a try, BitIRA provides the step to buying bitcoin with your 401(k) savings. Since most plans do not permit direct purchasing of digital currency, the best way to go about is to have a self-digital IRA with a qualified retirement plan service provider. To be eligible for a self-directed digital IRA you must be self-employed or have a small business without full-time employees except for your spouse or co-owner. Open a self-direct plan with a local bank and roll over the funds to the newly opened account. Once done, you are in complete control of the checkbook and can start investing in cryptocurrency. The entire process can take from four to ten days depending on the custodian holding your retirement funds and remember that a Roth 401(k) cannot roll over into this self-directed digital IRA.

Allen Lee

Written by Allen Lee

Allen Lee is a Toronto-based freelance writer who studied business in school but has since turned to other pursuits. He spends more time than is perhaps wise with his eyes fixed on a screen either reading history books, keeping up with international news, or playing the latest releases on the Steam platform, which serve as the subject matter for much of his writing output. Currently, Lee is practicing the smidgen of Chinese that he picked up while visiting the Chinese mainland in hopes of someday being able to read certain historical texts in their original language.

Read more posts by Allen Lee

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