Bitcoin could come to 401 (k) plans. Here’s how long it can take
Participants at the Bitcoin 2021 Convention, a cryptocurrency conference held on June 4, 2021 in Miami.
Joe Raedle | Getty Images
A recent Bitcoin conference in Miami drew a mix of professionals who have embraced cryptocurrency wholeheartedly.
Still, David Ramirez, chief investment officer at ForUsAll, said he was always able to surprise attendees with a new way of thinking about their holdings.
“I have met a lot of people who have been investing in this space for quite some time, who were considering massive capital gains exposure,” Ramirez said. “In 401 (k) this can be largely eliminated.”
ForUsAll announced this month that it has partnered with Coinbase, a cryptocurrency exchange, to allow employees to place up to 5% of their 401 (k) investments in bitcoin. and other cryptocurrencies. The feature is offered by employers who sign up for a so-called self-administered cryptocurrency window.
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ForUsAll isn’t the first company to offer bitcoin and other cryptocurrencies in 401 (k) plans. Companies such as BitWage and Digital Asset Investment Management are also working to integrate these investments with traditional pension plans offered by employers.
Investors can already tap into cryptocurrency through their individual retirement accounts. And some professionals say they see a growing appetite to extend this to 401 (k) plans.
Yet many traditional players in the industry are skeptical that employers offering pension plans, known as plan sponsors, will claim these investments.
“Plan sponsors in general are still very unlikely to want to adopt any type of cryptocurrency in their investment lineup,” said Aaron Potticchen, senior vice president of Alliant Retirement Consulting.
At the heart of the debate is whether these types of investments in a 401 (k) will end up helping or hurting investors.
Art at the 2021 Bitcoin Cryptocurrency Conference at the Mana Convention Center in Miami on June 4, 2021.
Marco Bello | AFP | Getty Images
Since 401 (k) plans are the primary savings choice for many Americans, not being able to access cryptocurrency on these accounts puts investors at a “structural disadvantage,” Ramirez said.
Taxes are one of the main reasons.
Roth 401 (k) accounts, where after-tax dollars are invested, may offer an edge to bitcoin investors, Ramirez said.
“If you invest in the cryptocurrency in your 401 (k) with Roth dollars, you keep 100% of the earnings, which essentially allows you to be tax-exempt forever,” Ramirez said.
Investing through a 401 (k) can also help people avoid a tax pitfall that many cryptocurrency investors face: the risk of tax negotiation, Ramirez said.
Take someone who buys bitcoin at the start of the year, then sells it after a price hike and buys the cryptocurrency ether. If the global market then collapses, they may end up owing more taxes on the first trade than they invested in the ether.
“Unfortunately, I have met a lot of people who learned this the hard way and had to liquidate positions to cover taxes or worse,” Ramirez said.
If instead the investment was made through a tax-deferred account, with pre- or after-tax dollars, the drawdowns aren’t generated every time you trade, he said.
There’s also another reason 401 (k) plans are better than IRAs: higher contribution limits.
This year, savers can put up to $ 19,500 in their 401 (k), or $ 26,000 for those aged 50 and over. In contrast, you can only put $ 6,000 in an IRA, or $ 7,000 for those 50 and over.
For investors who allocate up to 10% of their retirement savings to cryptocurrencies, a 401 (k) will give them the opportunity to invest more, said Adam Pokornicky, COO at Digital Asset Investment Management, which builds model portfolios which plan members can enroll in.
While some may argue that bitcoin is too volatile for a 401 (k), Pokornicky argues that it actually works in favor of investors. “Volatility is a good thing on the rise,” he said.
Another company named Bitwage launched its 401 (k) offering over a year ago alongside its existing bitcoin payroll services.
There is a demand for average dollar investments in bitcoin, and retirement accounts are the “best version,” said Jonathan Chester, CEO of Bitwage.
The company sees a lot of requests from attendees who want access to bitcoin and other cryptocurrencies in their 401 (k) s. “It’s very hot,” Chester said.
The biggest hurdle is getting companies to migrate to systems that allow bitcoin investment.
“It’s just about unlocking it in an easy way for 401 (k) sponsors – it’s going to allow the market to explode,” Chester said.
All three companies say they are already seeing demand from employers looking to add their offerings.
Yet traditional players still currently see more barriers than opportunities for people to invest in bitcoin in their 401 (k).
With the general increase in 401 (k) lawsuits, these types of investments could be vulnerable because they are so new, Pottichen said. Ultimately, the Ministry of Labor could provide more advice on how cryptocurrency investments should be managed in pension plans.
“At the moment, none of our clients are looking at cryptocurrency and believe it is an asset class that we must have as part of our investment universe to which we provide access to our employees, ”Pottichen said of Alliant’s customers, which run from start to finish. up to companies with thousands of employees.
Neal Nolan, director of corporate retirement services at Parsec Financial in Asheville, NC, said he recently had a client who wanted to add bitcoin to his 401 (k) through a self-directed brokerage account.
Even though it was the first time Nolan had received such a request, he wasn’t surprised. “I thought it would happen eventually,” he said.
After the company’s investment committee meeting, the plan’s trustees spoke out against it.
One of the reasons it is not included in the plan is that if a participant has a self-directed account, it must be offered to everyone. This could be a burden on plan sponsors, who would be responsible for monitoring these investments.
Additionally, an investment like bitcoin should be deemed reasonable for everyone in the plan, which is a high bar.
In the end, it’s better to risk being late for the party than for pension plans to sacrifice their role as good stewards of funds, Nolan said.
“If you don’t understand something, caution would suggest that you seek more information or wait,” Nolan said. “Never invest in something you cannot understand or explain.”