Why Is There a Disagreement on Including Crypto in Retirement Accounts? — Robert Ryerson
In fall 2022, Charles Schwab conducted a survey showing that nearly half of all millennials and Gen Z want to see cryptocurrency investments become part of their 401(k) retirement plans. This is perhaps not surprising considering that nearly half of respondents from these two generations say they already hold investments in cryptocurrencies outside of retirement accounts. In other words, they are already comfortable with the risks involved with crypto investment.
In comparison, few Gen X and boomer respondents indicate they want to see crypto among 401(k) options, and fewer still currently hold crypto investments. As these generations retire and younger ones advance in the workforce, the demand for crypto retirement products is likely to increase, especially as millennials and Gen Zers seek to outpace high rates of inflation.
Lawmakers Call for Inclusion of Crypto among 401(k) Options
In October 2022, the US Senate Committee on Banking, Housing, and Urban Affairs introduced the Retirement Savings Modernization Act, which would significantly expand investment options in defined contribution plans. This bill seeks to provide more options to combat high rates of inflation and the impending threat of a financial downturn. The legislation would amend the Employee Retirement Income Security Act of 1974 to allow private sector retirement plan sponsors to offer options diversified across a full range of asset classes rather than only those that are traditionally considered to be less risky. The act is meant to open up asset classes to 401(k) plan savers in the same way they are open to savers with defined benefit pension plans so that Americans can be more aggressive with their savings, especially when they are younger.
Pension plans have incorporated asset classes outside of the public markets since the early 1980s. However, the litigation risk was too high for 401(k) plans to follow suit. The new legislation would expand the definition of covered investment to protect against litigation risk, with digital assets among the newly protected classes of investment.
Some have expressed concern that the more conservative approach taken by 401(k)s will mean that no account can be aggressive enough to keep up with inflation and thus not lose purchasing power over time. Historically, pension plans have continuously outperformed 401(k)s because of their access to the full range of asset classes, which makes it possible to invest in risky assets with the potential for high returns, such as crypto.
The Pushback against Including Crypto in Investment Accounts
Of course, not everyone sees including crypto assets in retirement plans as a good thing. In March 2022, the US Department of Labor warned against including crypto investments in 401(k) plans because of the significant risks involved, including theft, fraud, and loss. Cryptocurrencies are notoriously volatile, and this sort of exposure could be disastrous for a retirement account that is not properly diversified.
The major concern is that investors will be too aggressive with their savings as they approach retirement and lose their entire nest egg if they do not include crypto strategically and meaningfully. However, it is important to keep in mind that even pensions do not invest entirely in high-risk assets; instead, they tend to have between 10 percent and 20 percent of savings in alternative investments.
Despite the concerns from some government officials, 401(k) plan administrators have begun to introduce crypto in certain ways. For example, Fidelity announced in April 2022 that it was introducing Bitcoin as an investment option for its new 401(k) products. Immediately, the Labor Department responded to this decision by repeating its concerns. Moreover, members of the Senate who oppose including crypto in retirement plans issued direct challenges to Fidelity and called for answers. Their questions largely focus on risk mitigation. Most professionals see crypto as an extremely risky option that is not appropriate for most investors and worry that including it in investment accounts could encourage unwise decisions.
The Bottom Line on Crypto Investment for Retirement
As critics of cryptocurrency assets in retirement accounts point out, crypto is incredibly risky. The November 2022 implosion of the crypto exchange, FTX, which had been heavily promoted by high profile people, was likely to lead to more calls for regulation and a “crypto winter” in the form of a long and deep bear market. For people willing to accept the risk, the payoff could be worthwhile. However, investors also need to accept the possibility of losing it all, which can be tricky when it comes to a retirement nest egg. Those who ultimately decide to diversify with crypto should limit their exposure to only what they can handle losing. The risk inherent in crypto may explain why the percentage of people in a generation who have already invested in crypto assets aligns with those who would want it for retirement accounts. Once you learn to mitigate the risk within parameters that make you comfortable, crypto could be a great tool for maintaining purchasing power during difficult economic episodes, and in this new period of higher inflation, in which the loss of purchasing power of the dollar is on display for all to see. It may only take a very small percentage allocation to cryptos in someone’s portfolio to offset the effects of inflation if there is a large crypto recovery in the coming years, based on growing acceptance and use.
Originally published at https://robertryerson.me on December 21, 2022.
