Fidelity Adds Bitcoin to 401(k) Menu but US Labor Department Cautions Employers
Fidelity Investments, one of the largest retirement-plan providers with over $4.2 trillion in assets under management, aims to allow clients to add a Bitcoin account to their 401(k) retirement plans—as long as their employers allow it.
However, employers might hesitate to embrace this, particularly given that the Department of Labor has recently issued a warning cautioning plan fiduciaries to be extra careful before adding a cryptocurrency option to a 401(k).
Fidelity to Allow Employees to Invest in Bitcoin
Fidelity is slated to offer the 23,000 companies that use its services to administer their retirement plans the option to put Bitcoin in their 401(k)s later this year, according to a report by The Wall Street Journal. Dave Gray, head of workplace retirement offerings and platforms at Fidelity, said there is a need for such a product:
“There is a need for a diverse set of products and investment solutions for our investors. We fully expect that cryptocurrency is going to shape the way future generations think about investing for the near term and long term.”
The report noted that Fidelity could allow investors to allocate as much as 20% of their nest eggs to Bitcoin, with employers having the option to lower the threshold for their employees. Initially, the service would be limited to Bitcoin, but the company plans to add support for additional cryptocurrencies in the future.
Gray detailed that management fees will range between 0.75% and 0.90% based on the number of clients and other factors. Moreover, he said that around 5% or less of the Bitcoin account “will be held in a short-term money-market fund to provide liquidity to facilitate daily transactions.”
Department of Labor Cautions Against Including Bitcoin in 401(k)s
Fidelity’s announcement to allow investors to put a Bitcoin account in their 401(k)s comes just a month after the US Department of Labor cautioned against such plans. On March 10, the agency published guidance warning employers to “exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu.”
“At this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies.”
The department added that under the Employee Retirement Income Security Act of 1974 (ERISA), the plan fiduciaries that allow such investment options “should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of” the potential risks.
Considering all these warnings by the Department of Labor, employers might abstain from widely adopting Bitcoin on 401(k) menus. Echoing this point of view, Michael Kreps, a principal at Groom Law Group, said the Labor Department’s guidance prevents “any conversations that were happening.”
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Fidelity’s Bitcoin Plans to Speed Up Adoption
A 401(k) plan is an employer-sponsored retirement account funded with money from employees’ paychecks. 401(k) plans are one of the biggest funds in the US and held an estimated $7.3 trillion in assets, representing nearly one-fifth of the $37.2 trillion US retirement market, as of late June 2021.
Therefore, Fidelity’s adoption of Bitcoin could prompt wider acceptance of the cryptocurrency even if employers proceed with the service with skepticism. This could also benefit the price of the flagship cryptocurrency as more funds will be poured into the coin.
Moreover, Fidelity and other prominent industry players have reportedly written letters urging the Labor Department to withdraw the guidance, which could encourage the department to adopt a more friendly stance towards Bitcoin.
Do you think other retirement-plan providers would follow suit and allow clients to add a Bitcoin account to their 401(k)s? Let us know in the comments below.