Here are the pros and cons of having cryptocurrency in your 401(k) plan


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Cryptocurrency is starting to appear as an alternative asset class in some 401(k) plans. Retirees may wonder if investing is wise.

“Making it so easy and accessible has both pros and cons [for investors],” said Douglas Bonepart, a certified financial planner and founder of Bone Fide Wealth in New York.

Fidelity Investments and ForUsAll, which administer workplace retirement plans, have begun offering cryptocurrencies like bitcoin to 401(k) investors in the past few months. Apparently they are the first company to do this.

However, that doesn’t mean all 401(k) plans will offer cryptocurrency.

Employers should use an administrator who grants access and then provide the cryptocurrency to employees. Some may be hesitant after the U.S. Department of Labor’s warning this year to “exercise extreme caution” before adding cryptocurrencies to more traditional stock and bond funds.

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The regulator identified speculation and volatility, as well as the challenge of “making informed investment decisions” for 401(k) investors, among its top concerns.

“As volatile as it is, it has tremendous upside potential,” said Ivory Johnson, CFP and founder of Delancey Wealth Management in Washington, D.C., referring to the cryptocurrency.

Bitcoinfor example, it has more than doubled since the start of 2021 to about $69,000 a year ago. Its current price, about $21,000, has since fallen 70%; The cryptocurrency market has lost $2 trillion in value since its peak.

Despite this pullback, bitcoin prices have still nearly tripled since the start of 2020.

Johnson, a member of CNBC’s Advisory Board, said the cryptocurrency’s rise could benefit buy-and-hold investors, especially at a time when many Americans are falling behind on retirement savings. The danger: Most people kneel down and sell short, he added.

Johnson said that unlike holding cryptocurrency in a taxable investment account, if investors sell their 401(k) cryptocurrency, the cryptocurrency income is not subject to capital gains tax.

But the rise of cryptocurrency also carries greater risk.

“You can be wrong,” Johnson added of a speculative bet on cryptocurrency. “People make decisions based on Twitter, they hear something catchy… and they go all in and put 30% of their retirement money into bitcoin.

“You [potentially] made a bad situation exponentially worse,” he said.

How to choose a cryptocurrency

Financial advisors advise investors to allocate only a small portion of their portfolio – usually no more than 5% – to cryptocurrency.

Investors with savings outside of a 401(k) plan should consider cryptocurrencies as part of their total investable net worth, said CNBC’s Bonepart.

For example, a person with $50,000 in a 401(k) plan and $100,000 in a separate taxable brokerage account would generally allocate 5% of that $150,000 to cryptocurrency, he said.

Johnson said a young investor in his 20s might be well-suited to allocating 5%, while someone in his 50s and closer to retirement age should reduce that risk.

Investment rules don’t go away just because you have a digital asset to invest in your account.

Douglas Bonepart

Founder of Bone Fide Wealth

Investors may need to rebalance their allocations over time as cryptocurrencies rebound or decline elsewhere in their portfolios.

“Investment rules don’t go away just because you have a digital asset to invest in your account,” Bonepart said. “Risk and reward, this relationship never goes away.”

Fidelity and ForUsAll have implemented some safeguards to try to limit exposure.

For example, Fidelity does not allow investors to put more than 20% of their 401(k) savings into a Digital Asset Account, although employers can choose to lower that limit. The account contains bitcoin and short-term, cash-like investments to facilitate day-to-day transactions.

ForUsAll limits deductions to 5%. It offers six cryptocurrencies – bitcoin, ethereum, solana, polkadot, cardano and USDC – and plans to add more soon. Of the 50 or so pension plans that offer cryptocurrency, 12.5% ​​of investors invest and allocate an average of 4% of their portfolio to cryptocurrency.

“Being 0% [of your portfolio]you’re 100% likely to be wrong,” Rick Edelman, founder of the Digital Asset Council of Financial Professionals, said at the Future Proof wealth festival in September in Huntington Beach, California.

He also advised investors not to put a significant portion of their portfolios in cryptocurrency.

Advisors stay with bitcoin, ethereum for now

Investors should not blindly jump into cryptocurrency because it exists, financial advisers said. As with other investments, they generally need to understand what they are buying.

The Labor Department warned that employers could send the opposite message to investors by adding cryptocurrency to traditional funds.

When employers offer cryptocurrency in a 401(k), “they effectively communicate to plan participants that knowledgeable investment experts have endorsed the cryptocurrency option as a prudent choice for plan participants,” the agency wrote. “This can easily lead plan participants astray and lead to losses.”

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Investors who choose to save some of their retirement money in cryptocurrency are probably best off sticking with bitcoin and ethereum, advisers said. Those are the biggest cryptocurrencies and it’s “exponentially harder” to speculate on anything else, Bonepart said.

“I think you’re going to see more and more bitcoin become a risk asset like stocks,” he said.

“We see it as mature,” he said. “Many question marks remain.”



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