Advisers cautiously upbeat about crypto 401(k) investing with Fidelity imprimatur

Investments advisers are cautiously optimistic about using cryptocurrency to build a retirement nest egg after Fidelity Investments made it easier, but they stressed the move must be evaluated for each investor.

Fidelity announced Tuesday that it's launching a product that will enable retirement plan participants to allocate a portion of their savings to Bitcoin through an option on their company’s 401(k) core investment menu. The company’s Digital Assets Account will be available to employers by the middle of the year.

The Bitcoin would be held by Fidelity, and employers would decide what percentage of a worker’s account could be directed into crypto, with a limit set at 20%. Fidelity, a major administrator of 401(k) programs, said it's seeing increased interest from employers to add digital assets to plans.

Advisers are being pressed by clients about cryptocurrency investing. They say that Fidelity’s imprimatur for using it in retirement accounts helps to bring some clarity to an asset that is shrouded in mystery, risk, volatility and popularity.

“Generally, I think it’s a great idea because Fidelity will help make crypto assets more accessible,” said Kelly Berenbaum, founder of Blue Tree Financial. “By the same token, each investor needs to be evaluated for appropriateness. If it’s available to them in their 401(k)s, then it’s something viable that we talk about in their retirement asset allocation.”

Tom Poltersdorf, owner of Beyond Your Exit Wealth Management, said cryptocurrency is a good way to diversify a portfolio if investors know what they’re doing.

“This is some exciting news with the caveat that there’s some education around it,” Poltersdorf said of Fidelity’s move. “As long as the client is aware of how it works, I think it’s a good thing.”

Most crypto investors are inexperienced, which makes Fidelity’s sponsorship of the digital asset account a helpful development in the marketplace, said Laura Varas, chief executive and founder of Hearts & Wallets, an independent research and benchmarking firm that focuses on saving, investment and financial advice.

A survey by Hearts & Wallets found that 25 million U.S. households, or 22% of those with assets, held cryptocurrencies in 2021. But that doesn’t mean they knew what they were doing. Investors, especially young ones, are going to keep buying crypto, so it’s good that they’ll be able to do it more knowledgably and safely through a company retirement plan, Varas said.

“There’s a lot of novices in this mixture of people trading crypto,” Varas said. “The workplace is an effective platform for engaging young investors in responsible investing.”

But Jeremy Bohne, founder of Paceline Wealth Management, is skeptical about making crypto an option for retirement investing.

“It’s a surprise to see that added to a 401(k) menu,” Bohne said. “[Crypto] being a speculative asset seems like less of a natural fit to me. This might not be using it in the right place.”

The Department of Labor also recently threw cold water on the idea of utilizing crypto assets in retirement accounts. In a compliance assistance release in March, the agency warned retirement plan fiduciaries to “ exercise extreme care” when considering crypto currency investments.

The agency reiterated its crypto caution Wednesday in response to Fidelity’s announcement.

“We continue to have the concerns that were raised in that guidance and stand by its conclusions,” Ali Khawar, DOL acting assistant secretary for employee benefits security, said in a statement.  “For all the reasons set out in that guidance, in dealing with any entity that is marketing cryptocurrency investments, plan fiduciaries should exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.”

Michael Kreps, principal at Groom Law Group, said the DOL crypto guidance is not equivalent to provisions in the Employee Retirement Income Security Act, the federal retirement law.

“DOL is certainly entitled to its opinions, and I’m sure they believe they are doing what is in the best interest of participants,” Kreps wrote in an email. “However, ERISA generally does not prohibit specific investments, and it is certainly possible a prudent fiduciary could reach a conclusion different from DOL’s.”

But someone who defends plan fiduciaries against lawsuits said they should carefully vet a decision to include a cryptocurrency offering on a plan menu.

“At this point in time, 401(k) sponsors are facing scrutiny that is unprecedented,” said Wendy Von Wald, fiduciary product manager at Travelers. “To add something with the complexity and volatility of cryptocurrency would require a great deal of due diligence, including consultation with outside ERISA counsel. It’s not something to be taken lightly.”

In the end, the decision on whether to include crypto in a 401(k) lineup rests with the plan fiduciaries.

“Simply because it’s an offering doesn’t mean it needs to be included in any plan,” Von Wald said.

Bloomberg News contributed to this story.