Employees won't be able to start adding cryptocurrencies to their retirement accounts right away, but later this year, the 23,000 companies that use Fidelity to manage their retirement plans will have the option to include bitcoin. The support of the country's largest retirement-plan provider indicates that crypto investing is becoming more mainstream, but it remains to be seen whether employers will embrace it for their employees.
Fidelity's decision comes just a month after the Labor Department expressed reservations about including cryptocurrencies in retirement plans. It is also a difficult time for the stock market, with the S&P 500 down nearly 10% this year, owing in part to rising interest rates. Bitcoin is notoriously volatile, having lost more than 40% of its value since its peak in November.
"There is a need for a diverse set of products and investment solutions for our investors," said Dave Gray, the Boston-based company's head of workplace retirement offerings and platforms. "We fully expect cryptocurrency to shape how future generations think about investing in the short and long term."
Fidelity would allow savers to allocate up to 20% of their nest eggs to bitcoin under the plan, though that threshold could be lowered by plan sponsors. Mr. Gray stated that it would initially be limited to bitcoin, but that other digital assets would be made available in the future.
To date, crypto investing has been virtually nonexistent in 401(k) plans. One small company that specializes in smaller 401(k) plans is allowing employees in some of the plans it manages to invest up to 5% of their 401(k) contributions in bitcoin and other cryptocurrencies.
The adoption of bitcoin by Fidelity may lead to broader acceptance among employers.
Mr. Gray stated that "we have seen growing and organic interest from clients," particularly those with younger employees, and that "a number are in the evaluation process" from a variety of industries.
The company manages plans with over 20 million participants and $2.7 trillion in assets under management. Fidelity also has a growing presence in the cryptocurrency industry, including a trading and custody platform for hedge funds and other sophisticated investors that it launched in 2018.
Fidelity's move comes at a time when interest in digital currencies is at an all-time high. According to Fidelity, approximately 80 million individual investors in the United States own or have invested in digital currencies. Some institutional investors, including some university endowments in the United States, have reportedly invested in cryptocurrencies or funds that buy them, as well as taken stakes in companies in the rapidly growing industry.
However, significant barriers may prevent bitcoin from becoming widely accepted on 401(k) menus. The United States Labor Department, which regulates company-sponsored retirement plans, issued guidance on March 10 cautioning employers to "exercise extreme caution before considering adding a cryptocurrency option to a 401(k) plan's investment menu," according to a department news release.
Employers who offer cryptocurrencies should expect questions from regulators about "how they can square their actions with their duties of prudence and loyalty" under US pension law, according to the department.
The Labor Department's Employee Benefits Security Administration's acting assistant secretary, Ali Khawar, wrote that "at this early stage in the history of cryptocurrencies," the department "has serious concerns about plans' decisions to expose participants to direct investments in cryptocurrencies or related products, such as NFTs, coins, and crypto assets."
According to Mr. Gray and industry lawyers, Fidelity, along with various trade groups representing the financial-services industry, wrote letters requesting that the Labor Department withdraw the guidance.
Some predict that employers will avoid incorporating cryptocurrency into 401(k) plans.
The Labor Department's guidance, according to Michael Kreps, a principal at Groom Law Group who specializes in pension law, has likely chilled "any conversations that were happening" with employers about adding cryptocurrency investments to 401(k) menus. A continuing trend of 401(k) fee litigation, he added, creates "a huge incentive for employers not to take risks with the 401(k)."
According to a spokeswoman for Vanguard Group, the company "has no plans to offer a cryptocurrency option within its 401(k) plans." The company claims on its website that "because cryptocurrencies are highly speculative in their current state, Vanguard believes their long-term investment case is weak."
Lew Minsky, president of the Defined Contribution Institutional Investment Association, a research and advocacy organization for investment managers, consultants, and others in the 401(k) industry, said his organization's members have no plans to make cryptocurrency available. "There's a lot of volatility," he said.
Companies have demonstrated little interest in allowing their employees to rely on cryptocurrency for retirement security. According to a recent Plan Sponsor Council of America poll, about 2% of the 63 employers polled said they would consider adding cryptocurrency to their 401(k) menu.
Proponents of incorporating a small amount of cryptocurrency into a portfolio claim that it can boost expected returns while lowering overall risk. Some believe that cryptocurrency can be used as a hedge against inflation.
Employees at companies that sign up for the new offering, according to Mr. Gray, can choose to transfer up to 20% of their account balances into a digital assets account that holds bitcoin and uses Fidelity's institutional trading and custody platform. Employees can also invest up to 20% of their payroll contributions in bitcoin, though employers can set lower limits.
When participants log into their online accounts, they will see pop-up boxes with educational information about bitcoin. When the balance in bitcoin holdings exceeds 20% of the value of a portfolio, the employee will be unable to transfer additional funds to the account from other 401(k) plan investments; however, the employee can continue to make payroll contributions. A short-term money-market fund will hold 5% or less of the bitcoin account to provide liquidity to facilitate daily transactions. Mr. Gray stated that the account fees will range between 0.75 percent and 0.9 percent, depending on the client, and will not include trading costs.
Fidelity declined to comment on whether it intends to include digital assets in its target-date funds. These funds serve as the default investments for employees who are automatically enrolled in 401(k) plans and receive the majority of new contributions.
ForUsAll Inc., a 401(k) provider, announced last year a partnership with Coinbase Global Inc.'s institutional arm, a leading cryptocurrency exchange, that will allow employees in plans it administers to invest up to 5% of their 401(k) contributions in bitcoin, ether, litecoin, and other cryptocurrencies through a self-directed digital asset window. ForUsAll, which was founded in 2012, offers automated 401(k) administration, a menu of low-cost mutual funds, and access to human advisers.
Fidelity's interest in cryptocurrencies dates back nearly a decade, when Abigail Johnson, the company's current chairman and CEO, began holding weekly internal meetings to discuss digital assets and blockchain technology. In 2015, the company began mining bitcoin. Later, it added a link to Coinbase, the cryptocurrency exchange, on retail customers' accounts to track their holdings. It will launch its own cryptocurrency fund for wealthy customers in 2020.