Bitcoin has been one of the hottest financial topics of discussion lately. The skyrocketing value enticed curious investors to look into the cryptocurrency and spurred people to ask about adding bitcoin to their 401(k)s or other retirement savings plans. The interest has somewhat dampened since the precipitous drop in January 2018, but the questions still linger.
The currency, and the multitude of other cryptocurrencies that have sprung up, relies on blockchain technology, a computerized ledger system that processes transactions (completed blocks) via secured wallets and keys.
The three biggest differences between cryptocurrencies and traditional government-issued currency are:
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
- Cryptocurrencies are digital and stored on a blockchain.
- Cryptocurrencies have zero government oversight.
- Bitcoin supply is limited or defined based on mining, unlike government-issued currency, which governments can print more of or shrink supply based on demand.
If you are not mining bitcoin, the purchase process is similar to valuing and purchasing art, which is one of the reasons the government treats bitcoin as property for tax purposes. The value of cryptocurrency is pure supply and demand and is based on an individual transaction at an exchange with your standard currency. With bitcoin, exchanges at any given moment in time can vary greatly.
Issues for 401(k) sponsors and participants.
How can a plan offer bitcoin to their participants? Currently, no mutual fund, collective investment fund or ETF in the United States has a fund exclusively invested in bitcoin or cryptocurrency.
Since a vast majority of 401(k) plans use these types of funds to trade daily for participants, bitcoin will not be a mainstream investment option. It is possible to purchase bitcoin futures on certain exchanges, however these can only be accessed by brokerage accounts that permit purchases in these exchanges.
Many plan sponsors that offer brokerage accounts restrict purchases to mainstream investments, such as mutual funds, ETFs and the major stock exchanges. Taking this down a different road, bitcoin owners store and track the bitcoin in wallets. A plan sponsor generally holds one position of each security on behalf of all participants. That means someone must hold the password for the wallet, which could be the plan sponsor or their selected recordkeeping service provider.
Think about the difficulties of trading between a mutual fund and a bitcoin wallet. There is no market close on bitcoin like there is with mutual funds, nor is there one recognized price or trading price.
The fiduciary element.
However, the greater consideration for plan fiduciaries is they must act as in the best interest of plan participants. The question a fiduciary must ask: Do they want to permit investments that are not regulated in any way, shape or form by any government? One can argue the futures exchange is regulated, it is, but the underlying investment is not.
Here’s another way to look at this from a fiduciary perspective. Traditional investments, such as bank or money market accounts, have protections by the FDIC. Investments in brokerage accounts or mutual funds whereby assets go missing are protected by the Securities Investor Protection Corp. (SIPC). Both the FDIC and SIPC have maximum protection per investor (the investor in a 401(k) plan is the plan, not the participant).
Bitcoin has zero protection for the investor in the event of fraud or a heist of your wallet. In addition, your bitcoin wallet has one password that is super long, and there is no password reset. If that password is ever lost, your bitcoin is lost! This is wide open for fraud at the 401(k) level, as to who should hold the password for the plan.
Taking it a step further, what if plan sponsors permitted each participant to have their own wallet and then they lost their wallet? In a litigious society, you know where this is going. An estimated 25% of bitcoins that were in circulation — $18 billion in value — are unrecoverable because of lost keys or wallets.
As fiduciaries, plan sponsors will be reluctant to offer a cryptocurrency as an investment option because of the volatility, lack of risk analysis, lack of government oversight and the hassle factor involved in administration.
Bitcoin is available for investment with your monies outside of a company plan. For example, you can already access it through a self-directed IRA, which could be a good option as it encourages investors to do this outside their 401(k) with IRA or after-tax monies. Since sponsors of 401(k) plans face potential litigation from participants related to their fiduciary responsibility, you will most likely not see bitcoin as an investment option until there is government oversight and efficient trading platforms within a 401(k) plan.
-
The Original Property Tax Hack: Avoiding The ‘Window Tax’Property Taxes Here’s how homeowners can challenge their home assessment and potentially reduce their property taxes — with a little lesson from history.
-
Is Mint Mobile's Home Internet a Game-Changer or Just Another Option?Mint Mobile recently unveiled its new home internet service. We break down how it works so you can determine if it's a great value for your needs.
-
Five Downsides of Dividend Investing for Retirees, From a Financial PlannerCan you rely on dividend-paying stocks for retirement income? You'd have to be extremely wealthy — and even then, the downsides could be considerable.
-
I'm a CPA: Control These Three Levers to Keep Your Retirement on TrackThink of investing in terms of time, savings and risk. By carefully monitoring all three, you'll keep your retirement plans heading in the right direction.
-
Debunking Three Myths About Defined Outcome ETFs (aka Buffered ETFs)Defined outcome ETFs offer a middle ground between traditional equity and fixed-income investments, helping provide downside protection and upside participation.
-
This Is Why Judge Judy Says Details Are Important in Contracts: This Contract Had HolesA couple's disastrous experience with reclaimed wood flooring led to safety hazards and a lesson in the critical importance of detailed contracts.
-
A Lesson From the School of Rock (and a Financial Adviser) as the Markets Go Around and AroundIt's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
