By Jim Trujillo
As a team of 401(k) advisors focused on participant outcomes, we are constantly fielding financial related questions from employees seeking advice. Lately, one of the main questions asked has been “what do you think about cryptocurrency?”
My typical response is to hit them back with a reverse uno card and say, “tell me what you think about cryptocurrency,” because if you’re asking that question, you probably already have some thoughts. My rebuttal is not meant to be stubborn or funny, but rather a simple test. Is your question coming from the hype you’ve heard from your cousin’s, sister in-law who had their gym trainer tell her they made millions from trading bitcoin? My advice on those calls, as you can imagine, is short and sweet.
But a good portion of the time, people already understand the major risks in crypto, and are simply interested in learning more. As educators, we prefer the latter. Instead of trying to throw a retirement savings lifeline saying, “I can save you! Just grab this well diversified, long term investment raft,” it’s more “here’s what you should know before you think about jumping into the crypto water.”
And here is what we tell them…Cryptocurrency is a currency that is digital, encrypted and decentralized. This means it is held in code, on computers instead of in banks and there is no central body managing the value of it like our government does with the US Dollar.
Off to a sketchy sounding start, right? But this way of holding currency is actually what makes it very difficult to hack and introduces us to the term blockchain. Have you ever played that story telling game where one person starts a story, then the next person retells that part then adds a little more to it, then the next person repeats it all back then adds their own part and so on and so on until someone messes up? Blockchain works in a similar way.
Imagine every time there is a transaction of crypto, it is being coded or “added to the story.” Then, the next transaction is coded by repeating the whole story, and then adding their portion, and so on, and so on. In this case, every person holding that crypto is now part of the story and has their own running copy that is updated every time someone adds to it. So, as you can now imagine, it is incredibly difficult for hackers to go back and change the story without being told by millions of coin holders “nope that’s wrong and now you are out!”
A lot of the time people are asking us about Crypto because they want us to make the recommendation to do it, but as a fiduciary, it’s impossible for us to recommend someone invest their hard earned retirement dollars into something so volatile, unregulated and mysterious. And the Department of Labor openly agrees as they have provided specific guidance on this subject in the recently published Compliance Assistance Release No. 2022-1.
In the DOL’s guidance, they acknowledge the wave of enthusiasm around crypto and the potential for them to become investment options in 401(k) plans. However, as is sometimes the case with governmental guidance, the DOL has essentially left it up to your discretion to decide if it is a good option for your participants.
The guidance asks fiduciaries of retirement plans to remember their main responsibility: act solely in the financial interests of plan participants and adhere to an exacting standard of professional care. In other words, be loyal to the people in the plan and make sure you are protecting them by always doing research and due diligence on everything that is offered.
So what happens if you do decide this is a good option for your participants? Our take is that they will hit you with the “I’m not mad at you…just disappointed” type of vibe. But again, they are not wrong for making these suggestions.
In our opinion, the DOL’s main concerns are completely valid, and if you’re considering offering crypto in your plan, they should be concerns of yours, as well. For example, as I write this article in May of 2022, Bitcoin has fallen over 50% since its high in November of 2021. It takes a serious steel stomach to be able to handle those types of swings. While that is an extreme variance, it is not uncommon for full percentage point swings to occur up or down very quickly in the crypto world.
And that is the DOLs first, and arguably most important, point for the persuasion against it: Speculative and Volatile Investments. As quoted in the guidance, “…extreme volatility can have a devastating impact on participants, especially those approaching retirement and those with substantial allocations to cryptocurrency.”
Other major concerns from the DOL include:
- The Challenge for Plan Participants to Make Informed Investment Decisions
- Custodial and Recordkeeping Concerns
- Valuation Concerns
- Evolving Regulatory Environment
The DOL guidance ends by setting the expectation that any retirement plans that offer cryptos could be subject to a newly created investigative program which aims to take action to protect the interest of participants. As a sign off, the last sentence is a daunting warning that any fiduciary allowing these investments should expect to be questioned. Nightmare fuel for fiduciaries because the last thing any of us want is to receive notice from the DOL on ANYTHING.
You would think this guidance and warning would be enough to dissuade all fiduciaries and providers from even thinking about offering crypto. You would think…so it was a huge surprise to see the 800-pound gorilla in the recordkeeping world, Fidelity, make an announcement that they will offer Bitcoin as an available investment on their platform. This news that dropped shortly after the DOL’s guidance on the matter, will allow employers the option to add it to their investment lineup.
It will be interesting to see how this bold move by the country’s largest 401(k) provider will play out. Essentially, in a game of 401(k) investment option poker, the DOL said we are all-in and Fidelity called. How the river plays out is yet to be determined, but both sides appear to think they have the upper hand.
Personally, I’m no gambler. At this point, these stakes are too high for me to even be sitting at that table. But the excitement of it all will continue to hit the headlines and spark interest in fiduciaries and participants alike.
Because of this, it’s important to stay educated on movement in this area. Additionally, having a general understanding of the pros and cons is always a safe bet. For now though, as a fiduciary, all bets are off in adding crypto to your investment lineup.
Financial Advisor J
[email protected]
www.ARGI.net
