There’s no room for crypto in employee 401(k) plans

Defined-contribution plans are one of the mainstays of Americans’ retirement preparations, along with Social Security. In light of the key role that 401(k)s play, the announcement earlier this month that a plan provider is making it possible for 401(k) participants to invest in cryptocurrencies seems like a step in the wrong direction.

ForUsAll, a retirement platform that targets small businesses, is rolling out a version of its offering that lets companies provide their employees with access to cryptocurrencies and other alternative investments in the plan, in an arrangement similar to a brokerage window. Participants would have access to up to 50 cryptocurrencies and could put up to 5% of their savings into crypto. If the value of their crypto holdings rises faster than the rest of their investments, so that the allocation exceeds 5%, ForUsAll will let them know.

Over the last 10 or 15 years, retirement plans have moved in the direction of simplifying investing for participants, in recognition of the fact that many workers aren’t informed about investing and aren’t eager to have to make investment decisions. The majority of plans now offer target-date funds, which let workers pick a fund, based on their expected retirement date, that provides an asset allocation suitable for their age.

WINDOW OF OPPORTUNITY?

Not that many 401(k)s offer brokerage windows, which let plan participants invest in individual stocks and bonds. PSCA’s 2020 survey of plans shows just 23.2% have a brokerage window, although larger plans are more likely to do so, at 39.6% of plans with 5,000 or more participants. And surveys suggest only about 4% of participants with access to a brokerage window use it.

Against that backdrop, cryptocurrencies seem like an odd fit. They’re arcane products that don’t yet have much of a track record, and they’re notable for their volatility. The most prominent crypto, Bitcoin, plunged almost 50% in April after having rallied to an all-time high of more than $60,000, and it routinely swings back and forth in response to the latest tweet from Elon Musk or moves by Chinese or U.S. regulators.

ForUsAll cites a few advantages of using cryptocurrencies in 401(k)s, including the diversification that crypto provides as well as the prospect that access to crypto and other alternatives could get employees more interested in investing. Given crypto’s current popularity, that could be true, but 401(k)s are designed to help employees build their retirement savings, not to train them in investing. And if plan participants invest in crypto only to see the value of those investments fall dramatically, that could be a factor that discourages them from investing.

Digital assets are slowly being accepted by big financial firms, advisers and institutional investors. But given the critical role that 401(k)s play in building Americans’ retirement savings, the plans should be one of the last places to sign up for crypto.