Having come on the heels of a Department of Labor warning about using crypto currency in retirement accounts, Fidelity's April announcement that it intended to do just that struck some industry observers as odd – or at least as strange timing. The massive drop in crypto valuation a month later further stirred opinions across the industry.
“I think the key is now the appetite on crypto has obviously shifted, especially when it comes to risk appetite,” said Tony Dhanjal, head of tax at Koinly, a London-based crypto tracking and tax reporting service. “I don't think there was much appetite for it prior to this bear run. And I think it's even less right now. And from a government point of view, my thought is we should not be allowed to put crypto into 401(k) plans, or pension schemes, just yet until regulations are enforced.”
For some insurers and fund managers, crypto potentially exacerbates and already burgeoning legal liability problem for retirement plan sponsors.
“At a time when plan sponsors are being sued for excessive fee allocations, or excessive record keeping fees, or offering investment options that have high expense ratios, or for investment options that don't perform, offering crypto in a plan would seem to be something that would cause me to pause,” said Wendy Von Wald, Fiduciary Product Manager at Travelers Insurance. “Not that it can't be done but just because crypto is available as an investment option doesn't mean that a plan sponsor needs to offer it to its employees.”
Von Wald said if employees want to invest in crypto, they could choose to do so through an IRA or outside of the retirement plans.
An 'obligation' to plan participants
“The retirement plans have an absolute obligation to act in the best interest of the plans and the plan participants,” she said. “And sometimes that means even when a plan participant wants to invest in something, the employer has to say it's not appropriate. At a time when fiduciaries are questioned for even the most basic of investment options, this is something that really should raise cautions.”
The DOL agreed with that viewpoint, when in March it issued a “compliance assistance release” putting fiduciaries on notice to “exercise extreme care,” when considering crypto investments. That didn’t seem to dissuade Fidelity, which just weeks later said it will launch a new product on its online 401(k) platform to allow retirement plans to allocate part of their assets into Bitcoin through their company’s investment options.
The DOL, which normally stays neutral about particular asset classes, then appeared to double down on the issue as it reiterated its concerns in a subsequent notice and pointed to its earlier release warning about the dangers of adding crypto to a retirement account.
The controversy was compounded with was the massive drop in crypto valuation in May, with some digital assets losing 60% or more of their value. The crash, which had some analysts and observers saying it marked the end of crypto as a legitimate investment, nevertheless didn’t deter Fidelity, which seems to be taking a long view on the investment matter.
A company spokesman said Fidelity is still committed to offering a broad product line with a goal of giving investors choice as they consider a strategy that is right for them. Its digital assets services and products, the company said, have evolved as a result of steadily growing demand from investors. It said Fidelity’s job is not to recommend Bitcoin as an investment but rather to offer choice. Despite the short-term price movement the company believes that blockchain and digital assets represent a large part of the financial industry’s future.
Not everyone agrees. And the debate rages within the investment community about the propriety of offering crypto as a retirement investment option, and even over whether crypto is a valid instrument for anyone.
Considering the customer's best interest
“Investing always carries some risk, but crypto – at least today – introduces a degree of uncertainty that, as a fiduciary, we don’t think is in the best interest of our customers,” said Eric Phillips, CFA, Senior Director of Partnerships and Strategic Insights at Human Interest, a 401(k) provider. “As an asset class, crypto is untested, unprotected, and volatile, which is why we don’t anticipate including it on our platform in its current unregulated state.”
Regulation, or the lack thereof, seems top of mind for several fund managers and advisors contacted about the issue.
The pressure to include crypto in retirement plan options is coming from people who have friends or have heard about people making quick fortunes in digital assets and want in. It’s a pressure employees and sponsors are finding hard to resist.
“I'd say probably over 70% of the advisors we work with have asked about the possibility of adding some crypto related assets to the platform,” said Dan Beck, CEO of 401GO a provider for small and medium-sized businesses. “And so we do have it as an availability, but it's something that has to be explicitly asked for by a financial adviser. And we go through a lot of work to make sure that the employer knows what that entails.”
Crypto motivates interest
Beck sees crypto as a vehicle for increasing participation and motivating interest in 401(k) plans for younger tech-savvy workers who have an already budding interest in the digital assets, rather than older workers approaching retirement who should not take the volatility risks inherent in crypto.
“There’s this problem that has existed for a long time that 401(k) plans don't do a great job of helping those who need the help the most,” he said. “So, when you look at the participation rates of the lower quartile of both age and wage, it's around 20%. Yet we find that same demographic tends to have a pretty strong interest in not just crypto related assets, but even environmental, social, and corporate governance investments.”
Beck noted that the DOL also expressed skepticism about ESG investments years ago, but the industry moved forward anyway.
“There's been a lot of interest in ESG firms,” he said. “And so I feel crypto is very much the same way.”
Other firms offer Bitcoin
Other major firms have stuck their corporate toes in the crypto water but after the crash weren’t eager to talk about it. Most notably Massachusetts Mutual Life Insurance Company, which announced at the end of last year that its broker-dealer, MML Investors Services, partnered with NYDIG, a leading provider of technology and investment solutions, for a Bitcoin fund. The company said it will offer qualifying clients access to the fund, “which provides an alternative and efficient way to invest in Bitcoin.” This followed the company’s $100 million investment in Bitcoin for its general investment accounts.
“MassMutual continues to believe that cryptocurrencies are increasingly becoming part of the financial landscape and is working on a number of initiatives to better serve its clients and financial professionals,” the company said at the time.
Following the crash, a spokesman for Mass Mutual said no one at the company was available to talk about those initiatives.
Despite all the cautions, warnings, and concerns about crypto, most advisors and fund managers said talk about the death of the digital assets were overblown.
The landscape has changed
“I think the landscape has changed, it’s more of a turning point, but not the death knell,” said Gilles Ubaghs, Strategic Advisor with Aite-Novarica’s Commercial Banking and Payments practice. “The most dangerous phrase in all of finance probably is ‘this time, it's different.’ But there have been a lot of crashes and bubble popping throughout the history of crypto and other asset classes.”
Nevertheless, Ubaghs said, institutions will probably begin to look at crypto more skeptically than they have in the past.
“I think we'll see a little bit less of the kind of irrational exuberance, that’s existed,” he said. “And that’s a good thing.”
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].