Want to own cryptocurrency in your 401(k)?
The U.S. Department of Labor, which oversees retirement plan regulations and fiduciary standards, just made it easier. On May 28, the department issued a release confirming an earlier decision to rescind guidance that called for plan fiduciaries to exercise “extreme care” before adding crypto options to the investment menu for participants.
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With barriers eased, how should retirement investors view this new opportunity? “As an advisor who sets up and manages 401(k) plans, I often get asked whether crypto should be included in a retirement portfolio,” says Derrick Alexander, owner and lead financial advisor at Greater Works Wealth in Tulsa, Oklahoma. “My short answer: I wouldn’t jump on the crypto bandwagon for retirement dollars, at least not yet.” Here are some points to consider when it comes to deciding how or if you should allocate a portion of your retirement investments to cryptocurrencies:
— Not the same as investing in stocks and bonds.
— Crypto’s risk factors.
— Balancing demand for crypto with retirement planning.
— Crypto’s speculative nature.
— Is there a role for crypto in a 401(k)?
— A small 401(k) allocation.
Not the Same as Investing in Stocks and Bonds
Many financial advisors take a firm stance against including digital assets in retirement plans, especially those intended to generate long-term income. They argue that traditional investments are backed by fundamentals that support reliable cash flow or the potential for capital appreciation, attributes that cryptocurrencies lack.
“Crypto does not belong in a 401(k). It is highly speculative and volatile, with no established store of value,” says Evan Luongo, owner and founder of NoDa Wealth in Charlotte, North Carolina.
“Stocks represent ownership in a company and a claim on its future growth. Bonds are contractual obligations where the borrower agrees to repay you with interest,” says Luongo, noting that stocks and bonds have underlying economic principles that justify why investors might expect a return, but crypto lacks a comparable economic foundation. “There is no inherent reason to expect it to generate a return,” he says.
Crypto’s Risk Factors
Some investors see crypto as a way to offset stock market downturns, but that thesis may not be as reliable as they believe.
“Crypto hasn’t yet proven itself as a non-correlated asset,” Alexander says. “While some claim it’s a hedge, we’ve consistently seen that when the broader market is down, crypto tends to follow suit.” That means it doesn’t currently offer the kind of diversification benefits investors would want in a balanced retirement portfolio, he adds.
The long-term viability of crypto in portfolios may be questionable, says Lawrence Sprung, founder and wealth advisor at Mitlin Financial in Hauppauge, New York. “Some crypto assets are more obscure than others and may not survive in the long run, which presents a great deal of risk,” he says.
Another problem, Sprung says, is that adding crypto to a portfolio gives 401(k) plan participants the ability to roll the dice and take a great deal more risk than they should with their retirement assets.
[READ: 7 Best Cryptocurrency ETFs to Buy]
Balancing Demand for Crypto with Retirement Planning
Financial advisors are cognizant of how clients want to invest, even if their interests are outside the typical parameters of asset allocation. “That’s why I allow clients to invest in crypto, but with guardrails,” Luongo says. “I advise keeping crypto to no more than 5% of the overall portfolio.”
More importantly, he says, he doesn’t include crypto holdings in clients’ financial planning projections. “In other words, if it were to go to zero, it would not derail the plan,” Luongo says. “It is treated as a speculative side bet, not a pillar of long-term success.”
Crypto’s Speculative Nature
With increasing mainstream acceptance, digital currencies are attracting interest from a growing number of investors. That’s especially true for people looking for alternative opportunities as the stock market remains volatile. Those mulling the idea of using crypto in their 401(k) accounts should consider how it fits within their broader long-term strategy.
“At this point, I’d consider crypto more of a speculative asset, something to explore with extra dollars in an individual brokerage account, not your retirement savings,” Alexander says. “If it hits, great. You participate in the upside. But if it tanks, it won’t jeopardize your financial future.”
Is There a Role for Crypto in a 401(k)?
Now that restrictions for adding crypto to 401(k) accounts have effectively been removed, it’s inevitable that some investors will add these assets. Do they provide any meaningful diversification, or are they a distraction from the aim of a 401(k), which is to build a foundation for retirement?
Sprung says he believes crypto should be an option available to 401(k) participants.
“With that being said, I do not believe all crypto is created equal and we should not allow all crypto investments to be made available,” he says. “I think Bitcoin (BTC) is the most reasonable option to be added for now, and I think we have to be cautious about what others may be added in the future.”
At this juncture, with crypto gaining acceptance, zero exposure may no longer be the most prudent option for long-term investors, says Jason Gilbert, founder and managing partner of RGA Investment Advisors in Great Neck, New York. His firm has begun helping clients gain exposure in retirement and trust accounts through direct ownership of Bitcoin, and has engaged BitGo as a custodian for these assets.
A Small 401(k) Allocation
For clients using traditional 401(k) platforms, a low-fee, transparent vehicle like the iShares Bitcoin Trust ETF (ticker: IBIT) can be a reasonable proxy. After BlackRock Inc. (BLK) launched IBIT in January 2024, it quickly became the biggest spot Bitcoin exchange-traded fund in the world and now has over $72 billion in total assets. It has an expense ratio of 0.25% and a one-year return of 61% as of June 11.
Gilbert says he recommends an allocation of less than 5% of total portfolio value. That most often falls in the range of 1% to 3%, he says.
“The biggest risk isn’t necessarily volatility; it’s treating crypto like a get-rich-quick scheme rather than the frontier asset it is,” Gilbert says. “For thoughtful investors, especially younger ones with long time horizons, a modest Bitcoin allocation is worth considering.”
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Should You Add Crypto to Your 401(k)? originally appeared on usnews.com
