Crypto investing coming to your 401(K) account

Sven

Three US Senators have urged Fidelity to stop its 401(k) sponsor partners from offering bitcoin exposure — likening crypto investing to “catching lightning in a bottle.”

In a Monday letter penned to Fidelity CEO Abigail Johnson, Democrat Senators Elizabeth Warren, Dick Durbin and Tina Smith argue that crypto markets have become riskier following FTX’s sudden collapse, making bitcoin unsuitable for retirement plans.

Boston-based Fidelity began allowing employees to put as much as 20% of their retirement savings into bitcoin exposure this fall.
The crypto industry considered the move a strong sign of shifting institutional sentiment toward the 12 year old asset class, although bitcoin has shed some 60% of its value since Fidelity flagged the 401(k) move in late April.

Fidelity, which overall boasts some $9.6 trillion in assets under administration, is the largest individual retirement plan (IRA) provider in the US — supporting more than 35 million IRA, 401(k) and 403(b) retirement accounts. As of 2020, FIdelity controlled more than a third of the retirement fund market in the US, maintaining $2.4 trillion in 401(k) assets.

https://blockworks.co/news/senators-fidelity-stop-offering-bitcoin-401ks

For full disclosure, Fidelity was my past 401(k) plan administrator. The choices were solid and their service, phone or online, were second to none. Outside of that, they also have been our main brokerage for many years.

Crash

insane.

Sven

There must be something that would benefits Abigail Johnson. I can see Robinhood offers this, but not Fidelity.

yogibearbull

Due to Fido's push for cryptos in general, and for 401k/403b in particular, I also started the "Crypto Crash" thread at the Fido Investment Community, a closed, by-invitation group for Fido account holders (links from there cannot be posted elsewhere). I kept that thread current for a while, but then just referred to the (open) MFO "Crypto Crash".
https://www.mutualfundobserver.com/discuss/discussion/60259/crypto-crash-11-8-22#latest

Sven

Good idea. thank you.

Crash

careful.
https://finance.yahoo.com/m/fa3d368c-be48-3192-a30c-6c4f1e109f04/crypto-firm-blockfi-files-for.html

Observant1

Fidelity administers my company's 401(k) plan.
Crypto is not currently available via this 401(k).
IMHO, crypto shouldn't be offered in defined contribution plans because it's too risky/speculative.

msf

With all due respect to Elizabeth Warren, Dick Durbin and Tina Smith, IMHO cryptocurrency is no more unsuitable today for employer-sponsored plans than it was a month ago. Their current letter is more or less a followup to a similar but more extensive letter sent by Senators Warren and Smith in May. That in turn came after DOL issued guidance on cryptocurrency in 401(k) plans in March, emphasizing its risks.

Fidelity isn’t the first company to give 401(k) participants access to cryptocurrency assets. Another industry provider, ForUsAll Inc., has linked workers with cryptocurrency exchanges through brokerage windows for several years. Fidelity takes a different approach with its Digital Asset Accounts product, which doesn’t rely on outside exchanges or brokerage windows.

Employee Benefit Plan Review, October 2022, Volume 76, Number 8, pages 16-19. CCH Incorporated.
(Published before FTX's collapse)

The genie has been out of the bottle since brokerage windows were allowed. Fidelity just provided another route to the same investments. That's not to say that plan sponsors have no responsibility for how those windows are used. The DOL guidance hints at that. Quoting again from CCH:

DOL provides a clear and definite warning to plan fiduciaries:

The plan fiduciaries responsible for overseeing such investment options or allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks described above.

While the focus of this guidance is on 401(k) plans, the DOL’s warnings also extend to plans and plan fiduciaries responsible for allowing cryptocurrency investments through self-directed brokerage windows.

One way of addressing this is to set limits. As stated in the OP, Fidelity sets a 20% limit. So the 20% Bitcoin decline in value lamented in the senators' letter would have resulted in a 4% or less decline in a participant's plan value. Significant but not catastrophic. And ForUSAll sets an even tighter limit, just 5%.

Finally, note that while some senators are advocating caution, others welcome wild west investing in retirement accounts.

Update: A Partisan Divide

The Department of Labor's cryptocurrency guidance has provoked contrasting responses on Capital [sic] Hill.

On May 5, Sen. Tommy Tuberville, R-Ala. introduced legislation that would prohibit the DOL from limiting the kinds of products workplace retirement savers can invest in through self-directed brokerage accounts.

A day earlier, Sen. Elizabeth Warren, D-Mass., criticized Fidelity Investments for its decision to launch a new 401(k) cryptocurrency product, in a May 4 letter to Fidelity CEO Abigail Johnson.

https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/dol-guidance-could-crimp-401k-brokerage-windows.aspx (Limit 3 free articles per month)

yogibearbull

The current crypto proposal in Congress is already being mocked as SBF/FTX-proposal that makes the CFTC as the regulating body for cryptos. It has other strange ideas too - self-certification for custody assets, etc. From what has transpired recently, this proposal needs a thorough review and revisions.

Some 401k/403b plans have taken their fiduciary responsibilities too seriously by limiting plan options to TDFs and only a handful of index and other funds. This may drive more people into brokerage options, if offered. Some others are going in a different direction - offer brokerage windows at high fees and be done with this responsibility stuff. Then, the cryptos can get in there too.

Clearly, there is some sensible middle ground.

msf

Congressional bills regarding cryptocurrency (S. 4760 / H.R. 8730) have at most a tangential relation to DOL's regulation of 401(k) plan investments.

Here's a brief negative critique summarizing the bill(s): https://ourfinancialsecurity.org/2022/09/news-release-cftc-should-have-narrow-role-in-crypto-to-preserve-sec-primacy/

For more specifics, that links to a letter detailing several concerns:
https://ourfinancialsecurity.org/wp-content/uploads/2022/09/AFR-Letter-Stabenow-Bill.pdf

And a similar letter with some different items described:
https://www.nasaa.org/wp-content/uploads/2022/09/NASAA-Letter-to-Committee-Leadership-Regarding-the-DCCPA-9-9-22-F.pdf

Finally, a set of slides on the state of cryptocurrency regulation in the United States, "Brought to you by the Connecticut Department of Banking and the Securities Advisory Council to the Banking Commissioner", dated November 15, 2022.

Among other things, it explains how cryptocurrencies can be viewed as securities by the SEC, as a commodity interest by the CFTC.
https://www.daypitney.com/wp-content/uploads/2022-11-15-Unmasking-Crypto-Presentation-Final.pdf

The Congressional bills were referred to the House Committee on Agriculture and to the Senate Committee on Agriculture, Nutrition and Forestry. I suppose given the risks involved, it makes a kind of warped sense to lump crypto in with pork belly futures

As to DOL fiduciary duty, my feeling is that it doesn't go far enough. The standard is what a prudent investor would do, not what each individual employee would do.

While I would personally be delighted with a brokerage window, I do not think that it serves a typical employee well. Studies have shown that employees when faced with a myriad of options (even without a window), are paralyzed. They may dump everything into cash, or divide their money evenly among all options, or not even participate. More choice is not necessarily better choice.

See, e.g.
https://www.marketplace.org/2022/01/11/default-options-are-popular-in-financial-decision-making-but-are-they-effective/
https://www.wsj.com/articles/are-too-many-choices-costing-401-k-holders-1454900917

Old_Joe

And in current "crypto" news:

Crypto lender BlockFi files for bankruptcy after FTX collapse-
Chapter 11 bankruptcy filing as fall of FTX continues to reverberate across industry

Following are excerpts from a current report in The Guardian:

The crypto lender BlockFi has become the sector’s latest big operator to declare bankruptcy, as the fallout of the collapse of offshore cryptocurrency exchange FTX continues to spread.

BlockFi, which operates in a similar fashion to a conventional bank, paying interest on savings and using customer deposits to fund lending, says it has $256.9m cash in hand. According to court documents, its creditors include FTX itself, to which it owes $275m, and the US Securities and Exchange Commission (SEC), to which it owes $30m.

In a statement announcing its Chapter 11 bankruptcy filing, BlockFi said: “This action follows the shocking events surrounding FTX and associated corporate entities and the difficult but necessary decision we made as a result to pause most activities on our platform.

“Since the pause, our team has explored every strategic option and alternative available to us, and has remained laser-focused on our primary objective of doing the best we can for our clients.

“These Chapter 11 cases will enable BlockFi to stabilise the business and provide BlockFi with the opportunity to consummate a reorganisation plan that maximises value for all stakeholders, including our valued clients.”

The SEC levied a $100m fine on the company in February for violating securities laws, arguing that the investment products the company offered qualified as unregistered securities. The outstanding $30m debt is apparently the unpaid portion of that fine.

BlockFi has already stumbled close to bankruptcy once already this year, in the wake of spring’s crypto crash.

After chief executive Zac Prince said the company needed an injection of capital to stave off a liquidity crisis, it signed a deal with none other than FTX, which gave the company access to $400m in loans. The price of the deal was an option from FTX to buy the lender for about $240m, a sharp decline from a peak valuation of $3bn.

That option was never exercised, and the collapse of the cryptocurrency exchange sparked a bank run at BlockFi, seen by customers as dangerously entangled with Sam Bankman-Fried’s company, that proved terminal. Without the ability to draw on the credit line, nor access its own funds stored on the FTX platform, BlockFi was forced to file for Chapter 11 bankruptcy.

Crash

The weird craziness of pseudo-reality.

Mark

@Crash - who'd a guessed huh?

Old_Joe

From today's "The World in Brief", published by The Economist:

Bitfront, an American crypto exchange, said it would cease operations, though it claimed that the move was unrelated to the collapse of FTX, the platform that went bankrupt earlier this month. Separately, BlockFi, a one-time darling of the industry, filed for bankruptcy and Kraken, another exchange, agreed to pay more than $360,000 to America’s Treasury for allowing transactions with users in Iran.

Crash

the more things change, the more they stay the same.