The crypto market has grown from $119 billion in 2019 to nearly $2T globally in 2022, with both institutional and retail demand growing significantly. In fact, ⅓ of US institutional investors are already investing in cryptocurrency, and 69% stated that they believe cryptocurrency has a place in a balanced portfolio. Many plan sponsors and 401(k) investors are eagerly anticipating the ability to add cryptocurrency to 401(k) plans, while others are skeptical. The Department of Labor (DOL) recently issued a statement indicating that cryptocurrency can be added to 401(k) accounts, but strongly stressed that this must be done prudently.
We at ForUsAll are heartened to see that the DOL shares the same views as we do around the risks inherent in volatile assets like cryptocurrency. In fact, we raised many of these same concerns to the department during our conversations with the DOL, where we had an opportunity to receive and incorporate their feedback into the design of the program.
While the DOL continues to express concerns about the inherent prudence of cryptocurrency as an asset class in a 401(k), and does not endorse any cryptocurrency solution, we believe our solution meets all fiduciary standards defined under ERISA.
Why crypto has a place in a modern 401(k)
Along with duties of loyalty and prudence, fiduciaries have a duty to diversify. Cryptocurrency is an asset class that has been adopted by sophisticated investors, and academics have shown that its low correlation with traditional assets and its high risk-adjusted returns may allow small allocations in a well-diversified portfolio to materially increase expected returns without increasing risk. But given its volatility, it’s critical that access to cryptocurrency is accompanied by built-in investor protections that help ensure employees do not put their retirement savings at undue risk.
Lift the efficient frontier
Academic researchers at institutions such as Yale and others have found that established cryptocurrencies (such as Bitcoin) may act as portfolio diversifiers because of their historically low correlation to traditional assets, and because of their relatively high adjusted risk-returns.
ForUsAll’s Alt401(k) solution is designed to comply with the DOL's recent statement. Its built-in features offer protection against the risks the department raised. Our plans are designed to be ERISA-compliant, and are guided by regulatory framework, modern portfolio theory, and careful risk management.
ForUsAll’s 401(k) plans are built to allow investors access to diversification tools that many professionals use, but with participant education and careful limitations to guard against undue risk. Access to cryptocurrency will be an option in our plans, but not as part of the core investment lineup. We believe it’s important to present participants with options, but in a responsible and diligent manner. This responsibility is a cornerstone of every plan.
ForUsAll’s 401(k) plans are built to allow investors access to diversification tools that many professionals use, but with participant education and careful limitations to guard against undue risk.
Fiduciaries have an obligation to not only help investors make prudent choices, but to educate them about the potential benefits and drawbacks of their options. ForUsAll provides full financial disclosures to every participant to ensure that they make informed decisions. In addition, investors will not be able to access the self-directed cryptocurrency window before they take and pass an interactive quiz, thus demonstrating their understanding of cryptocurrency’s risk and their investment options.
Risk itself is mitigated by the plan design. Crypto allocations are capped at 5% of the total 401(k) balance plus 5% of ongoing contributions, which is in keeping with the principles of effective portfolio management and diversification. While crypto enthusiasts may push for larger allocations, we understand this asset class’s place in the total portfolio makeup, and the need to protect against the potential for large concentrated risk. The 5% cap allows investors to take advantage of potential gains without risking their full portfolio. If, due to market forces, the percentage of the portfolio allocated to crypto exceeds 5%, participants are notified through a system of alerts, and are given the option to rebalance to a more prudent risk level.
Protections against fraud, theft, and loss
The DOL’s announcement states that it is concerned with theft, fraud and loss. Moreover, it highlights concern “about the reliability and accuracy of cryptocurrency valuations.” Because we share this concern, ForUsAll’s experienced investment committee carefully screens all assets for a minimum level of investability and to help ensure access to institutional quality cryptocurrency. Our screening process examines blockchain security, the background of the team providing the asset, institutional backers, technological use cases, adoption rates, and other factors. Our platform does not allow access to meme coins like Doge or Shiba Inu, unverified tokens, or coins that have not met our rigorous standards. We believe that proper investment valuation is crucial for any asset, from stocks to cryptocurrency.
The self-directed cryptocurrency window is designed to protect users against fraud, data breaches, and password loss through cold storage of funds, 2-factor authentication, and other advanced security measures.
In order to keep detailed records and comply with ERISA standards, ForUsAll has designed its plans to integrate with any recordkeeper. Market values are reported daily to recordkeepers so that participant balances can maintain accuracy. In addition, we selected a qualified custodian, Coinbase Institutional, to store and process crypto allocations. The self-directed cryptocurrency window helps protect users against fraud, data breaches, and password loss through cold storage of funds, 2-factor authentication, and other advanced security measures.
Cryptocurrency will soon be available in 401(k) accounts. At ForUsAll, we’ve taken a proactive approach when designing our plans to address potential issues with safety, and to protect investors from undue risk. Guided by input from regulatory bodies, law, and academic research, we arrived at a plan design that incorporates alternative assets in a secure, prudent way, in keeping with our duties as fiduciaries.
With careful plan design, comprehensive guidance, and proper portfolio management, participants can take advantage of this asset sensibly. If you’re interested in adding cryptocurrency to your company’s 401(k) plan, get in touch with one of our retirement plan consultants to learn more.