Fidelity offers bitcoin in 401(k) retirement plans

For a former Fidelity executive, bitcoin in workplace pension plans evokes a very non-digital analogy: birth control.

Start with the real world: a FOMO-fueled frenzy about the biggest investment trend of the 21st century, in which dozens of people are feverishly trading volatile cryptocurrencies on platforms like Coinbase. Laura Varas, former vice president of Fidelity, views this growing activity as reckless behavior that goes against the principles of prudent investing – like teenagers having unprotected sex.

Thus, when Fidelity Investments said On Tuesday that it would allow investors to hold bitcoin in their 401(k)s, Varas, the founder of Hearts & Wallets, a market research and benchmarking firm, said she was thinking about condoms. “Consumers are now trading crypto in a risky way that concerns us,” she said. “Loyalty allows consumers to do something they already do, and in a more responsible way.”

It’s far from clear that financial advisers and regulators – crypto’s biggest skeptics – will agree.

Fidelity, the nation’s largest provider of workplace pensions, will let the roughly 23,700 companies for which it administers plans choose to offer bitcoin as an option to investors starting later this year. Retirement savers can invest up to 20% of their savings in bitcoin, although individual plans may set a lower maximum. Almost no 401(k) currently offers a digital investment option. This makes Fidelity, which oversees 401(k)s holding more than $2.7 trillion in retirement assets for more than 20 million people, the first major retirement plan provider to open bitcoin to the ranks of employees. .

The Boston-based financial giant will give investors indirect ownership of bitcoin, the best-known digital currency, through a “digital asset account” that uses its institutional trading and custody platform. Currently, most investors who buy or sell cryptocurrencies need to set up a digital wallet on a cryptocurrency exchange.

Douglas Boneparth, a crypto enthusiast and president of Bona Fide Wealth, a fee-advisory firm in New York, called Fidelity’s move “a very optimistic thing for bitcoin.” The digital currency, now at around $38,000, is down more than 40% since its peak last November at nearly $69,000.

At the same time, Boneparth said it was unclear how Fidelity would internally manage the bitcoin it holds for investors. “Is it like a mutual fund?” He asked. “A futures exchange-traded fund? We don’t know how it will work.

In its announcement, Fidelity said a digital asset account in a 401(k) would hold bitcoin and short-term money market investments “to provide the necessary liquidity to the account to facilitate day-to-day transactions on behalf of of the investor”. Investors will pay management fees ranging from 0.75% to 0.90% of the value of the bitcoin they hold, Fidelity spokesman Mike Shamrell said. Fidelity will also levy an as yet undisclosed trading fee.

Labor Disorders
Fidelity’s big move comes just a month after the Department of Labor, which regulates company pension plans, issued a stern warning on cryptocurrencies in 401(k)s, warning companies to “exercise extreme caution” when deciding whether to include them in plan menus. One of the issues, the agency said in its March warning, was that plan sponsors are required by law to act as trustees for plan participants and refrain from offering ” imprudent investment options”. Calling digital money a “speculative and volatile” investment, he said pension plans that offer digital currencies “should expect to be asked how they can reconcile their actions with their duties of care and of loyalty in light of the risks described above.”

US 401(k) plans hold nearly $7.3 trillion, according the Institute of Investment Companies. Fidelity thus controls 37% of this market. But his Bitcoin move may portend a fight with the Department of Labor.

“Sometimes being big means you can almost define what’s common practice,” said Jesse St. Cyr, benefits attorney at Poyner Spruill in Raleigh, North Carolina. While someone with Fidelity’s resources might fight an audit, he said, “many other plan sponsors and service providers would be unwilling to do so.”

Always careful
Not all major pension plan providers intend, at least now, to copy Fidelity’s decision.

“Vanguard does not intend to offer a cryptocurrency option in 401(k) plans,” spokeswoman Carolyn Wegemann said.

A spokesperson for T. Rowe Price cited “the high level of speculation and lack of regulatory clarity in this space”, adding that “the mandates we manage for clients today are not well suited for direct investing. in digital assets”. Still, the spokesperson added, “Given the size of digital asset markets, their impact on capital markets cannot be ignored. Our research will continue.

After the Labor Department’s warning, more than 57% of pension plan sponsors said they “would never consider cryptocurrency as a viable investment option,” according to a report. survey by the Plan Sponsor Council of America last month. Only 1.6% said they would continue to consider the merits of crypto in the wake of the agency’s caution.

Matt Peterson, executive director of the National Association of Government Defined Contribution Administrators, a trade group for public sector employee pension plans, said that while some members were interested in offering crypto investments, “it’s still a new territory, and we encourage extreme caution for anyone who decides to invest their retirement dollars in a bitcoin fund.

A Schwab spokesperson said that while no company using Schwab’s 401(k) platform offers crypto investments on its menus, approximately 60% of Schwab Retirement Plan Services customers offer a brokerage window. in 401(k) plans through which investors can invest in cryptocurrency. some products.

Fidelity estimates that approximately 80 million US individual investors currently own or have invested in digital currencies. Varas, who is also a former vice president of consumer banking at Citigroup for Latin America, said crypto usage had tripled in the past year. Hearts & Wallets Data shows that nearly one in four US households, or 22%, now use crypto, whether for payments, commerce, or both, up from 8% in 2020. Nearly four in 10 Gen Z and millennials own the cryptography. For Generation X, the rate is 27% and for Baby Boomers, only 6%. The trade is behind the nearly three-fold increase, according to a March 24 report from the company, as crypto users “cite fear of missing out.”

FOMO is not a way to invest, said Varas, who led management and product development for Fidelity’s equity mutual funds in the early 2000s. (She chose to leave after becoming pregnant with her third child.) Fidelity’s decision “doesn’t is not about empowering people to take undue risks with their 401(k),” she said. “The workplace is a great way to engage young consumers in responsible investing.”

Financial advisors, especially independent ones who have a fiduciary duty to put the client’s interests first and avoid conflicts of interest, have been relatively slow to adopt cryptocurrencies for clients. Only 14% of advisors recommend digital currency, according Cerulli Associates. But eight out of 10 receive questions from customers.

Nearly one in two advisers, or 45%, said they expect to steer clients into crypto investments “at some point.” Yet only 31% of advisors said they plan to recommend cryptocurrency as an investment in the future.

Varas argued that in a world of online brokerages like Robinhood and investors trading similar stocks like baseball cards, Fidelity could take bitcoin seriously: “It’s much more about establishing a platform investment than letting people play with their 401(k). ”