Why Cryptocurrencies Shouldn’t Be Added To 401(k) Plans

The Labor Department essentially just warned the managers of workplace retirement plans: Don't you dare think about adding cryptocurrency — it's too risky.

The department's directive follows President Biden's executive order this month calling for a review of the government's regulatory approach to cryptocurrencies. Biden's order talks about the volatility of cryptocurrency, but it also signals an acceptance of the viability of digital currencies and a lot of concern that it could lead retirement plans to prematurely embrace the investment as an option for employees.

Globally, financial authorities are exploring the introduction of central bank digital currencies. The possibility of a cashless society makes investing in cryptocurrency seem like a no-brainer. If you're late to this trend, you could be missing out on great gains, according to cryptocurrency proponents. But then these are people whose fortunes often depend on you buying into this

speculative investment option.

With millions of people investing through their workplace plans, this is a key moment for digital assets. Here's what you need to know.

Why is this an issue now for the Biden administration?

The administration is concerned about promoters' recent efforts to pitch cryptocurrency options to 401(k) plans. The directive is intended to get out in front of the issue before it became a serious problem, risking the safety of people's retirement money.

"Cryptocurrency has gained mainstream popularity and notoriety, but there is still great uncertainty about how the market will develop, and we thought it was important to highlight our

concerns," Ali Khawar, the acting assistant secretary leading the Labor Department's Employee Benefits Security Administration, said in response to my questions about the interest in cryptocurrency for retirement plans.

Khawar said fiduciaries — those making decisions on behalf of individual retirement investors — should be particularly concerned about taking steps to encourage investment in cryptocurrencies. It's just too soon.

In a blog post about the Labor Department's release, Khawar wrote: "The assets held in retirement plans, such as 401(k) plans, are essential to financial security in old age — covering living expenses, medical bills and so much more — and must be carefully protected."

What’s different about the risk of cryptocurrency vs. other investment options?

This asset class is extremely volatile.

"Extreme volatility can have a devastating impact on participants, especially those approaching retirement and those with substantial allocations to cryptocurrency," the Labor Department said in its release.

The administration also pointed to the challenge of educating people about cryptocurrency.

"Cryptocurrencies are very different from typical retirement plan investments, and it can be extraordinarily difficult, even for expert investors, to evaluate these assets and separate the facts from the hype," the Labor Department said.

There are record-keeping issues. Cryptocurrencies are not held like traditional plan assets in custodial accounts but exist as lines of computer code in a digital wallet.

"With some cryptocurrencies, simply losing or forgetting a password can result in the loss of the asset forever," the department points out. "Other methods of holding cryptocurrencies can be vulnerable to hackers and theft."

How much interest is there in cryptocurrency for retirement plans?

Fidelity Investments, one of the largest managers of workplace plans, said it does not have any clients offering direct investments in cryptocurrencies. But some are wondering whether they should, because retirement investors increasingly view digital assets, and bitcoin in particular, as a legitimate asset class for long-term investing.

"We have seen a relatively small, but growing, interest from plan sponsors in providing their employees access to digital assets in defined contribution plans," said Dave Gray, head of workplace products and platforms at Fidelity.

Why wouldn't workers believe bitcoin is their ticket to a fabulously wealthy life?

The promoters are very persuasive.

Actor Matt Damon, in a commercial for a cryptocurrency company, says, "Fortune favors the brave." In other words, you're a dope not to put your hard-earned money in this new thing that is sure to make you rich.

They neglect to talk about the risks to the average investor.

"These investments can all too easily attract … inexpert plan participants with great expectations of high returns and little appreciation of the risks the investments pose to their retirement investments," the Labor Department said.

Can plans offer cryptocurrencies?

Technically, there's no ban on cryptocurrencies, but the Labor Department cautioned that companies need to "exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan's investment menu for plan participants."

Do digital assets have a place in a retirement plan?

Under the Employee Retirement Income Security Act, companies have an obligation to ensure they are being cautious in the investment options they offer workers.

Even if employees are asking for a crypto option, it may not be in their best interest, said Alan Levine, co-chair of the executive compensation and employee benefits department at New York-based Morrison Cohen.

"This is retirement money," Cohen said in an interview. "People have to live on this. And while there may be get-rich-quick or sexy aspects to bitcoin, it is unlikely to be prudent to put it in at this moment in time. Maybe in the future that will be different, maybe when there's more regulation about it from the SEC. Fiduciaries who manage 401(k) plans and other retirement plans potentially have personal liability."

Cohen said more guardrails need to be in place before companies offer cryptocurrencies.

People can invest and get rich or not get rich, but for now it should be outside of their 401(k) plan, he said.

The Labor Department's release may seem counter to Biden's order for "highest urgency" on research and development of a digital dollar, but it was a much-needed cautionary lecture about this highly speculative investment option in retirement plans.

The future, more often than not, favors the sensible.

I favor what HBO "Last Week Tonight" host John Oliver said about cryptocurrency: It's "everything you don't understand about money combined with everything you don't understand about computers."