When Will Bitcoin Make Its Way to 401(k) Plans?

If you're itching to get into the bitcoin game within your company’s retirement plan, cool your jets. There are plenty of reasons why it's not possible yet.

(Image credit: Petar Chernaev)

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:

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  1. Cryptocurrencies are digital and stored on a blockchain.
  2. Cryptocurrencies have zero government oversight.
  3. 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 (opens in new tab) — $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.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Keith H. Clark Jr.
Managing Partner, DWC - The 401k Experts

Keith Clark is co-founder and managing partner of DWC - The 401k Experts (opens in new tab), founded in 1999. He is the author of "The Defined Contribution Handbook" and was named one of the top five consultants in "Pension Management Magazine."

Clark is also an adjunct professor at the University of Minnesota's Carlson School of Management.