Here are the pros and cons of owning cryptocurrency in your 401(k) plan

Here are the pros and cons of owning cryptocurrency in your 401(k) plan

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Cryptocurrency is starting to appear as an alternative asset class in some 401(k) plans. Retirement savers may be wondering if it’s wise to invest.

“Making this easy and accessible has both pros and cons [for investors]“said Douglas Boneparth, certified financial planner and founder of Bone Fide Wealth in New York.

Fidelity Investments and ForUsAll, which administer workplace retirement plans, began offering cryptocurrencies such as bitcoin to 401(k) investors in recent months. They seem to be the first companies to do so.

However, this does not mean that all 401(k) plans will offer crypto.

Employers must use an administrator who grants access and then choose to make crypto available to workers. Some may balk after a warning from the US Department of Labor this year to exercise “extreme caution” before adding crypto alongside more traditional stock and bond funds.

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The regulator identified speculation and volatility, as well as the challenge for 401(k) investors to “make informed investment decisions,” among its top concerns.

“As volatile as it is, it has the potential for huge upside,” said Ivory Johnson, CFP and founder of Delancey Wealth Management in Washington, referring to the cryptocurrency.

Bitcoin, for example, peaked a year ago at nearly $69,000, more than doubling since the start of 2021. Its current price, at around $21,000, is down 70% since then; the crypto market as a whole has lost $2 trillion in value since its peak.

Despite this pullback, bitcoin prices have still nearly tripled since the start of 2020.

Crypto’s advantage could benefit buy-and-hold investors, especially at a time when many Americans are behind on retirement savings, said Johnson, a member of CNBC’s advisory board. The downside: Most people are knee-jerk and short-selling, he added.

Unlike holding crypto in a taxable investment account, crypto returns do not incur capital gains tax if and when investors sell their 401(k) crypto holdings, Johnson said.

But the advantage of crypto also comes with greater risk.

“You may be wrong,” Johnson added of a speculative crypto bet. “People make decisions based on Twitter, they hear something compelling…and they put it all together and put 30% of their retirement money in bitcoin.

“You have [potentially] made a bad situation exponentially worse,” he said.

How to Choose a Crypto Allocation

Financial advisers recommend that investors allocate only a small portion of their portfolio – usually no more than 5% – to crypto.

Investors with savings outside of their 401(k) plan should consider their crypto allocation as part of their overall net worth to invest, said Boneparth, also a CNBC advisory board member.

For example, someone with $50,000 in a 401(k) plan and $100,000 in a separate taxable brokerage account would typically allocate up to 5% of that $150,000 total to cryptocurrency, a- he declared.

A young investor in their 20s may be well suited for a 5% allocation, while someone in their 50s who is closer to retirement age should likely reduce that exposure, Johnson said.

Investment rules do not disappear just because there is a digital asset to invest in your account.

Douglas Boneparth

founder of Bone Fide Wealth

Investors may need to rebalance their allocations over time as crypto outpaces or lags returns elsewhere in their portfolios.

“Investment rules don’t go away just because there’s a digital asset to invest in your account,” Boneparth said. “Risk and reward, this relationship never goes away.”

Fidelity and ForUsAll have safeguards in place to try to limit exposure.

For example, Fidelity prohibits investors from placing more than 20% of their 401(k) savings in its digital asset account, although employers can choose to lower this cap. The account holds bitcoins and short-term cash-like investments to facilitate day-to-day transactions.

ForUsAll limits allocations to 5%. It offers six cryptocurrencies — bitcoin, ethereum, solana, polkadot, cardano, and USDC — and plans to add more soon. Among the more than 50 pension plans that have made crypto available, 12.5% ​​of investors invest and allocate an average of 4% of their portfolio to crypto.

“To be at 0% [of your portfolio]you’re probably going to be 100% wrong,” Ric Edelman, founder of the Digital Assets Council of Financial Professionals, said in September at the Future Proof Wealth festival in Huntington Beach, California.

He also advised investors against placing a significant portion of their portfolio in cryptocurrency.

Stick with bitcoin, ethereum for now, advisers said

Investors shouldn’t blindly jump into crypto just because it’s available, financial advisers said. As with other investments, they generally need to understand what they are buying.

The Labor Department has warned that employers could send the opposite message to investors by adding crypto alongside traditional funds.

When employers offer crypto in a 401(k), “they are effectively telling plan participants that knowledgeable investment experts have approved the cryptocurrency option as a prudent option for plan participants,” the author wrote. ‘agency. “This can easily mislead plan participants and lead to losses.”

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Investors choosing to save money for their retirement in cryptocurrency are also likely best suited by sticking to bitcoin and ethereum, at least for now, the advisers said. They are the biggest cryptocurrencies and are “exponentially harder” to speculate with anything else, Boneparth said.

“I think you’ll see bitcoin more and more become a risky asset like stocks,” he said.

“We see it maturing,” he added. “There are still many question marks.”

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