Keep Cryptocurrencies Out of 401(k) Plans | Economic news


The Department of Labor has basically just warned managers of workplace pension plans: Don’t dare to think about adding cryptocurrency — it’s too risky.

The ministry’s directive follows President Joe Biden’s executive order this month calling for a review of the government’s regulatory approach to cryptocurrencies. Biden’s order speaks to the volatility of cryptocurrency, but it also signals an acceptance of the viability of digital currencies and great concern that this could lead retirement plans to prematurely adopt the investment as an option for employees.

Globally, financial authorities are exploring the introduction of central bank digital currencies. The possibility of a cashless society makes investing in cryptocurrency seem like a no-brainer. If you fall behind this trend, you could miss out on big gains, according to cryptocurrency proponents. But then these are people whose fortunes often depend on your buying into this speculative investment option.

With millions of people investing through their business plans, this is a key time for digital assets. Here’s what you need to know.

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Why is this a problem now for the Biden administration?

The administration is concerned about recent efforts by promoters to offer cryptocurrency options to 401(k) plans. The directive aims to expose the problem before it becomes a serious problem, jeopardizing the safety of pensioners’ money.

“Cryptocurrency has grown in popularity and notoriety, but there is still great uncertainty about how the market will evolve, and we thought it was important to highlight our concerns,” said Ali Khawar, Secretary acting deputy head of the Department of Labor Employee Benefits Security Administration. said in response to my questions about the interest of cryptocurrency for pension plans.

Khawar said trustees — those who make decisions on behalf of individual retirement investors — should be particularly keen to take steps to encourage cryptocurrency investment. It’s just too soon.

In a blog post on the Department of Labor publication, Khawar wrote, “Assets held in retirement plans, such as 401(k) plans, are critical to the financial security of older adults – covering the costs of subsistence, medical expenses and much more – and must be carefully protected.

How is cryptocurrency risk different from other investment options?

This asset class is extremely volatile.

“Extreme volatility can have a devastating impact on participants, especially those nearing retirement and those with substantial cryptocurrency allocations,” the Labor Department said in its statement.

The administration also highlighted the challenge of educating people about cryptocurrency.

“Cryptocurrencies are very different from typical retirement plan investments, and it can be extremely difficult for even expert investors to value these assets and separate fact from hype,” the Labor Department said. .

There are record keeping issues. Cryptocurrencies are not held like traditional plan assets in custodial accounts, but exist as lines of computer code in a digital wallet.

“With some cryptocurrencies, simply losing or forgetting a password can result in the permanent loss of the asset,” the department points out. “Other methods of holding cryptocurrencies may be vulnerable to hackers and theft.”

What interest is there in cryptocurrency for pension plans?

Fidelity Investments, one of the largest workbench managers, said it has no clients offering direct cryptocurrency investments. But some wonder if they should, as retired investors increasingly see digital assets, and bitcoin in particular, as a legitimate asset class to invest in for the long term.

“We’ve seen relatively small, but growing, interest from plan sponsors in providing their employees with access to digital assets in defined contribution plans,” said Dave Gray, Head of Midstream Products and Platforms. work at Fidelity.

Why wouldn’t working people believe that bitcoin is their ticket to a fabulously rich life?

The promoters are very convincing.

Actor Matt Damon, in an ad for a cryptocurrency company, says, “Fortune smiles on the brave.” In other words, you’re a fool for not putting your hard-earned money into that new thing that’s sure to make you rich.

They neglect to talk about the risks for the average investor.

“These investments can too easily attract . . . inexperienced plan participants with high expectations of high returns and little appreciation of the risks that investments pose to their retirement investments,” the Labor Department said.

Can the plans offer cryptocurrencies?

Technically, there is no ban on cryptocurrencies, but the Labor Department has warned that businesses should “exercise extreme caution before considering adding a cryptocurrency option to the menu. investment of a 401(k) plan for plan participants”.

Make digital assets have a place in a pension plan?

Under the Employees Retirement Income Security Act, companies have an obligation to ensure that they are prudent in the investment options they offer workers.

Even if employees ask for a crypto option, it may not be in their best interest, said Alan Levine, co-chair of the executive compensation and benefits department at New York-based Morrison Cohen.

“It’s retirement money,” Levine said in an interview. “People have to live with that. And while there may be get-rich-quick or sexy aspects to bitcoin, it’s unlikely to be safe to implement at this particular time. Perhaps that in the future it will be different, perhaps when there is more regulation of this by the SEC Trustees who operate 401(k) plans and other retirement plans potentially have personal liability .

Levine said more guardrails need to be in place before companies offer cryptocurrencies.

People can invest and get rich or not get rich, but for now that should be outside of their 401(k) plan, he said.

The Labor Department’s release may seem contrary to Biden’s ‘highest urgency’ order on researching and developing a digital dollar, but it was a much-needed cautionary tale about this option. highly speculative investment in pension plans.

The future, more often than not, favors the sensible.

I support what HBO “Last Week Tonight” host John Oliver said about cryptocurrency: it’s “everything you don’t understand about money combined with everything you don’t understand about computers”.

Michelle Singletary is a personal finance columnist for The Washington Post. His column operates on Sundays.


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