Advisers caught between Fidelity, DOL on using crypto in 401(k)s

Retirement plan fiduciaries and financial advisers who work with them are caught between two powerful forces — Fidelity Investments and the federal government — as they consider using cryptocurrency investments in retirement accounts.

Fidelity announced last month that it will soon launch a product on its online 401(k) platform that allows retirement plan participants to allocate part of their assets into Bitcoin through their company’s core investment menu.

Before Fidelity made its move, the Department of Labor had sent a warning about using crypto in retirement accounts. In March, the agency issued a compliance assistance release cautioning retirement plan fiduciaries to “exercise extreme care” when considering crypto currency investments.

The push and pull have put investors in a holding pattern.

“There is not an adviser who is not getting phone calls from plan sponsors about [using] crypto in plans,” said Keith Clark, managing partner at DWC The 401(k) Experts, a retirement plan compliance consultant. “No one has come out and said it is imprudent. But you read some of these comments, and you see it is a risk.”

Adam Blumberg, co-founder of PlannerDAO, a crypto-focused community of about 1,000 financial planners, characterized the mood among advisers as “very, very hesitant” when it comes to utilizing cryptocurrency for retirement saving.

One of the reasons they’re holding back is because they don’t know whether the DOL will go further than just urging caution on crypto. Plan sponsors don’t want to undertake the effort and expense of adding a crypto option to a plan only to have to remove it if it's prohibited .

“I don’t want that hassle if the government is eventually going to make it illegal,” Blumberg said. “The regulatory uncertainty would cause me to have some second thoughts.”

A former DOL official said the agency isn't trying to ban crypto from retirement accounts. But it is reacting to an emerging risky investment that lacks transparency and benchmarks while being marketed with slick television advertisements.

“I can see why they put out a yellow caution light,” said Phyllis Borzi, a former DOL assistant secretary and head of the Employee Benefits Security Administration. “Now that it’s in the embryonic stage, you need to take more care. Make sure you’re not bedazzled by the feel-good commercials.”

Although the price of Bitcoin has been falling for months, it remains a popular investment. Clients often push their advisers about getting into the crypto market.

Fidelity, the largest retirement plan record keeper, was responding in part to that demand when it created its Digital Assets Account. Fidelity would hold the Bitcoin, and employers would decide what percentage of a worker’s account could be directed into crypto, with a limit set at 20%.

Since Fidelity’s announcement, lawmakers have jumped into the fray.

Sens. Elizabeth Warren, D-Mass. and a member of the Senate Banking Committee, and Tina Smith, D-Minn. and a member of the Senate Health Education Labor and Pensions Committee, recently sent a letter to the company questioning why it's offering Bitcoin in retirement plans and asking how it will address “the significant risks of fraud, theft and loss.”

On the other side of the aisle, Sen. Tommy Tuberville, R-Ala., introduced a bill that would prohibit DOL from implementing a regulation or releasing guidance that would limit the types of investments that plan participants can use in self-directed 401(k) accounts.

Dave Gray, Fidelity’s head of workplace retirement offerings and platforms, said the company continues to talk with regulators and policymakers and agrees with them about the importance of protecting the best interests of retirement savers.

Fidelity’s Digital Assets Account is a “responsible solution for plan sponsors who want to meet the demands of mainstream interest in crypto,” Gray said in a statement. “The DAA features several institutional consumer safeguards including but not limited to, excessive trading oversight, investing limits, transparency, market-leading education, and cyber-security features.”

A DOL spokesperson didn't respond to a request for comment.

Borzi said Fidelity’s entry into the retirement savings crypto space raises the stakes for DOL.

“It would be irresponsible of the department not to take a closer look at this product,” she said.

Ultimately, it will be plan sponsors and their advisers who make the decision on whether to incorporate crypto into retirement accounts.

Trisha Qualy, managing partner at Affiliated Advisors, is leery. She said most clients don’t understand cryptocurrency and shouldn't use it to build a retirement nest egg.

“Crypto likely will be appropriate at some point, but it doesn’t seem appropriate right now,” Qualy said. “For most clients, when you start asking them enough questions, they come to the realization they’re not familiar enough” with cryptocurrency.

Blumberg said crypto has some features that could make it viable in retirement accounts, such as its being a long-term investment.

“If I want to invest in crypto, and it fits my risk profile, a 401(k) plan is a good place to do it,” he said.

But for now, crypto caution is rampant among advisers.

“Most of the investment advisers I talk to are staying away from it because they deem it high risk,” Clark said.