Fidelity’s plan to allow bitcoin into 401k accounts is a risky investment
In late April, Fidelity, the nation's largest provider of 401 k plans, said that it would make it possible for participants to invest a portion of their 401 k account balances inBitcoin. The digital assets account would become widely available by mid-year and could be integrated into the 401 k investment menu, just like traditional mutual funds. If the plan added the option, participants would be able to allocate 20% of their assets to the bitcoin BTCUSD account, not clear whether it s contributions or assets. The account fee will be between 75 and 90 basis points based on the amount contributed by the employer.
Labor Department says Fidelity s plan to allow bitcoin into 401 k accounts is too risky.
My plan was to rail against the proposal, based on the idea that people shouldn't be investing in things they don't understand. It is a system of payment but the unit of transaction has a value that appears to fluctuate significantly. Warren Buffett said he wouldn't buy all the bitcoins in the world for $25. It doesn't generate any returns for investors because of the fact that it doesn't produce any cash flow. The only way to make a profit is to sell it back for a higher price. It is more like gambling than a productive investment.
Read: Why do I not want bitcoins in my 401 k Although I am not above railing, I can tell you more because an ERISA expert has a reasoned case against the use of digital currency in 401 k plans in a recent law review article. The article looks at five categories of alternative investments: 1 real-estate investment trusts REITs 2 art, 3 bitcoin and other cryptocurrencies, 4 ESG funds and 5 hedge funds and private equity. REITs, hedge funds, and private equity do not pass the test, while art funds,Bitcoin, andESG funds do not. Whether or not a specific asset class is appropriate for 401 k plans involves a fact-driven inquiry that involves applying ERISA's fiduciary standards of prudence, diversification, and loyalty. Is the asset class acceptable? Is it true that trustees are only acting in the interest of the participants? How can the asset class improve diversification?
The threshold consideration is the general acceptability of the asset class to a broad group of investors, and the author argues that it is particularly important for the trustees of defined-benefit plans. Defined-benefit plans and 401ks are like enterprises in that they accumulate retirement resources for distribution to participants and therefore one might think they would be open to similar asset classes. The two types of plans differ in ways that would suggest that 401 k trustees should be more cautious in terms of investments than trustees of defined-benefit plans. 401 k plans involve small accounts managed by unsophisticated investors with shorter time horizons and defined-benefit plans involve large amounts of capital managed by professional fiduciaries with long time horizons. It doesn't make sense to offer an asset class to 401 k participants before it has been accepted by the professional trustees of defined-benefit plans.
It has not been embraced by defined benefit trustees because of the fact that it fails the threshold test of acceptability. It is not surprising that the volume of bitcoins is relatively small in 2009, and the price of the digital currency is volatile, trading in thin markets. Since January, the value of digital currency has lost half of its value.
Addition ofbitcoin to the menu of 401 k investments is not prudent. Fidelity should not be opening the door to this type of activity. Our retirement system is wobbly and should not turn 401 k plans into casinos.