Cryptocurrency in Retirement Plans
Bitcoin hit the six-figure milestone, surpassing $100,000 in early December 2024 (you may have heard this from your co-worker, son, or favorite barber). With this recent development, it seems like a good time to revisit the topic of cryptocurrency in retirement plans.
While adding cryptocurrency to a retirement plan may seem appealing to some, it raises several concerns and regulatory questions. In this article, we’ll share some of those concerns along with comments and guidance from industry leaders.
Volatility and Risk Management
Cryptocurrency is known for its extreme volatility. The prices of digital assets can fluctuate dramatically within a short period, presenting a significant risk for retirement savers who rely on long-term growth. For instance, Bitcoin has experienced sharp price swings of 10% or more in a single day, which could substantially impact the value of a retirement account if crypto exposure becomes a large portion of the portfolio.
For retirement savers, particularly those nearing retirement, the risk associated with this volatility may not be justifiable. Traditional retirement accounts, such as 401(k)s and IRAs, are designed with the goal of providing growth over time. The inclusion of cryptocurrencies, with their speculative nature, could threaten the long-term growth of a retirement fund, potentially leading to major losses in times of market downturns.
Lack of Consumer Protections
Unlike traditional investments that are overseen by regulatory bodies like the Securities and Exchange Commission (SEC), cryptocurrencies exist in a largely unregulated environment. While there have been discussions around regulating digital currencies, the legal framework is still in development, and many risks, such as fraud and manipulation, remain high.
In the event of a crypto exchange failure or cyberattacks targeting digital wallets, there may be no clear legal recourse for investors. This raises alarms for plan participants who rely on their retirement funds to be there when needed. Without protections in place, retirement savers may be exposed to significant risks, including the potential loss of their investment in the event of a hack or scam.
Regulatory Uncertainty
Cryptocurrency regulation remains in flux, with various government agencies and lawmakers weighing in on how digital assets should be treated. In the United States, the SEC and the Commodity Futures Trading Commission (CFTC) are both involved in regulating aspects of the crypto market, but they differ in their approach. The SEC generally treats cryptocurrencies like securities, while the CFTC has taken a more hands-off approach, focusing primarily on commodities trading.
This regulatory uncertainty complicates the integration of cryptocurrencies into retirement plans. For example, if the SEC were to suddenly impose stricter regulations on digital currencies or classify them as securities that require additional compliance measures, it could add complexity and administrative burdens to retirement plan providers.
Recent Guidance / Comments
In 2022, the U.S. Department of Labor (DOL) issued guidance warning against the inclusion of cryptocurrencies in 401(k) plans due to their speculative nature and the associated risks.
In March of 2022, the Employee Benefits Security Administration (EBSA) issued guidance that encouraged plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu.
On December 4, 2024, the Government Accountability Office (GAO) published a report observing that cryptocurrencies are barely used in retirement plans. The report mentioned a survey that the investment is a miniscule fraction (less than 1 percent) of total investing. Those assets were mostly held in self-directed brokerage windows and the recordkeepers that were surveyed mentioned their plans did not offer cryptocurrency investments on their core investment lineups.
So where does Conrad Siegel stand on cryptocurrency? We don’t believe cryptocurrency has a place in a retirement plan menu. While the most likely outcome is that cryptocurrency plays out as nothing but a short-term fad, it may still gain traction throughout the world if and when countries start to recognize it as a currency, or at least a competitor to existing currencies. Nevertheless, it doesn’t have the backing of any entity, it’s not based on fundamentals, and you really can’t buy much with it. We view the current market for cryptocurrency as purely speculative with huge volatility.
Have questions about this topic or other retirement plan fiduciary topics? Contact our team!