Planning to offer access to crypto on your business's 401(k) plan? Learn about how you can offer this to your employees, along with the benefits and risks.
Cryptocurrency is now widely recognized as its own asset class, and has the potential to provide material returns on investment as well as diversification benefits as part of a balanced investment portfolio. There’s a good chance many of your employees would like crypto as an option in your 401(k) plan. While the vast majority of 401(k) providers do not currently offer crypto just yet, the landscape is changing quickly. This is an investment you’ll soon be able to offer your employees. But managing a workplace retirement plan is about ensuring you have offered employees a reasonable range of investment choices. Here’s what you should know before adding cryptocurrency to your plan.
Can You Add Cryptocurrency to a 401(k) Plan?
To start, you may wonder whether cryptocurrencies are even a possibility as a 401(k) investment. These plans typically stick to long-utilized, traditional investments like mutual funds and ETFs. So, you’d be forgiven if you had not yet considered including individual cryptocurrency tokens.
The reality is, the Employee Retirement Income Security Act of 1974 (ERISA) does not state which specific type of investments can and cannot be included in a 401(k). Instead, the law instructs plan fiduciaries to act with prudence and diligence when selecting investment options.
There are ways to meet these criteria for cryptocurrency. That’s why in 2022, ForUsAll became the first 401(k) provider to allow plan participants to invest directly in crypto and we are currently the only ones doing so. Fidelity is getting in on this trend and announced they will begin offering crypto 401(k) investment options in 2022.
The reality is, the Employee Retirement Income Security Act of 1974 (ERISA) does not state which specific type of investments can and cannot be included in a 401(k).
What Are the Potential Benefits of Adding Cryptocurrency to Your 401(k)?
As mentioned above, cryptocurrencies are widely recognized as an asset class with the potential benefit of increased diversification when added to a total portfolio. In a 2021 Pew Research Center survey, 16% of Americans say they invested in, traded or used cryptocurrency. This number leaps even higher for younger Americans. 31% of Americans between ages 18 to 29 said they invested in cryptocurrency, including 43% of males in this age group.
These are key demographics for workers in tech, finance, engineering and other in-demand fields. Because the typical worker has most of their savings in their workplace retirement plan, it’s their main avenue for investing and building wealth. By offering investments these employees want, they may be more engaged with your plan and more likely to contribute.
Surveys show that many “employees would prefer new or additional benefits over a pay raise: and that “employees at small-to-midsize companies ranked ‘workplace savings and retirement plans’ as an important factor in remaining with their employer.” With high rates of employee turnover projected to continue, if not increase, offering cutting edge benefits packages is more important than ever. Two trends that have emerged in the battle for talent, especially for tech workers, is that employers are offering cryptocurrency as compensation as well as enhancing the quality of their 401(k) plans. Adding crypto as an investment option in your 401(k) may help achieve both goals. By providing access to this asset class in the 401(k), it could be a chance for your business to not only retain your workers, but also to attract talent from other companies that haven’t made this move.
Two trends that have emerged in the battle for talent, especially for tech workers, is that employers are offering cryptocurrency as compensation as well as enhancing the quality of their 401(k) plans.
How Can You Add Cryptocurrency to a 401(k)?
Now that cryptocurrency has become an option for 401(k) plans, there are generally two ways to offer it to your employees: as an option in your core investment menu, or through a Self-Directed Window, similar to the Self-Directed Brokerage Account (SDBA).
Core Investment Menu
Your 401(k) core investment menu is typically a selection of several investment options, with different allocations to stocks and bonds. Every employee has access to these choices and they are the main options that employees have when investing their savings. You generally have at least three options in your core investment menu. Adding a greater range of options, including crypto, can help employees achieve more diversity in their portfolios, which may reduce their risk.
Using your core menu does not require you to set up a side account like a self-directed window does. It also provides all employees a convenient way to invest in crypto with no extra administrative steps.
A drawback though is that it restricts variety. There’s a limit to how many selections can be on a core investment menu before employees feel overwhelmed. A Columbia Business School research study found that 401(k) participation rates are highest when plans offer fewer than 10 investment options and as plans added more options, fewer employees invested. For crypto, that might mean you could include a crypto-based ETF or perhaps one major token, like Bitcoin, but you likely wouldn’t want to include dozens of options.
There’s a limit to how many selections can be on a core investment menu before employees feel overwhelmed.
ERISA requires that when you add an investment to your core investment menu you make the determination that it is a prudent investment for the plan. The inclusion of an investment on the core investment menu carries with it the risk of liability for the plan fiduciary in the event the investment is determined to be imprudent. Accordingly, you should be cautious before making crypto a Designated Investment Alternative (DIA). No 401(k) providers currently allow cryptocurrency on their core investment menus, but we understand that Fidelity plans on using this approach to introduce its crypto solution.
As an alternative to including cryptocurrency in the core menu, it may be appropriate to offer it through a self-directed window. A self-directed window, like a self-directed brokerage account (SDBA) is not a DIA. With a self-directed window, an employee can open a separate account within the plan. This gives employees freedom to go beyond the choices on your core investment menu and then they can pick the funds, stocks, bonds and cryptocurrencies they want for their portfolio (depending on what’s available with your 401(k) provider.)
The benefit of a self-directed window is it gives your employees more freedom to pick the cryptocurrency investments they want. Employees must elect to use a self-directed window. This extra step shows they are willingly making the investment.
A drawback of a SDBA or self-directed window is that if you don’t already have this plan feature you would need to spend time setting them up for your employees. This process could involve paying extra fees to the companies overseeing these accounts. However, new startups are making these options increasingly affordable and available for businesses. ForUsAll uses our Self-Directed Digital Asset Window when you decide to offer cryptocurrencies as part of a 401(k) plan.
ForUsAll uses our Self-Directed Digital Asset Window when offering cryptocurrencies as part of a 401(k) plan.
What Types of Cryptocurrency Investments Could Employees Make?
It will depend on the provider operating your 401(k). Since this is a very new field, the options will most likely vary. Some providers might decide to offer very limited selections like crypto-based ETFs or the most basic tokens like Bitcoin and Ethereum.
ForUsAll offers a wider range of up to 50 different tokens with direct access via its Self-Directed Digital Asset Window. This is in contrast to other 401(k) plan providers, which only plan on offering funds with synthetic exposure to track the price of a single token, not direct ownership of many tokens. Speak with your plan provider to see what options you could offer once they allow crypto in your 401(k).
How Can You Mitigate the Risks of Offering Crypto in the 401(k)?
One of the key considerations for employers before offering cryptocurrency in the 401(k) is to understand how they can reduce risks to participants. There are a few steps you might take to protect your employees:
1. Keep participation in crypto optional
Cryptocurrency investing is not for everyone. Don’t make cryptocurrency an automatic or required investment as part of your 401(k). Making crypto available through a self-directed window rather than as a DIA may help emphasize this point.
2. Consider limits for maximum crypto investments
Cryptocurrency is a volatile investment. It might play a role in a diversified portfolio but some would argue that it shouldn’t be a person’s entire portfolio. Consider setting a limit to what percentage of an employee’s 401(k) balance can go into cryptocurrency. At ForUsAll, the limit is initially 5% of a participant’s 401(k) balance, then ongoing contributions of 5%.
An experienced 401(k) crypto provider can provide your workers educational support for their investment decisions.
3. Work with an experienced 401(k) crypto provider
Your employees need education to help them understand the fundamentals of cryptocurrency investing, including the risks, so they can decide whether crypto makes sense for their portfolio. An experienced 401(k) crypto provider can provide your workers educational support for their investment decisions. They also set up guidelines and guardrails to protect your employees. At ForUsAll, participants must pass a quiz on the risks of cryptocurrency investing before they are allowed to open their account.
An experienced 401(k) provider that offers crypto can also help you set up your plan as a whole and take on the fiduciary responsibilities of running your plan. Click here for more information on how your growing business could offer cryptocurrency in your 401(k).
Nothing in this post should be construed as a recommendation by ForUsAll, Inc., its affiliates or employees (collectively, “ForUsAll”) as a recommendation to activate a cryptocurrency window or invest in cryptocurrency. Investing in cryptocurrency can be risky and investors must be able to afford to lose their entire investment. You should consult with your own advisers before activating a cryptocurrency window or investing in cryptocurrency. ForUsAll does not provide legal, tax, or accounting advice.
Go beyond a basic 401(k)
Give your employees more than just a 401(k), join the movement.
David Ramirez, CFA, is a recognized 401(k) expert with over 20 years of experience in 401(k), ERISA, cash balance plans, and ESOPs. A UC Berkeley graduate, he played a pivotal role at Financial Engines, a 401(k) advisory firm founded by Nobel Laureate William Sharpe, Ph.D., where he was a portfolio manager who helped manage over $50B in 401(k) assets. His clients included some of the largest Fortune 500 companies and state governments.
Go beyond a basic 401(k)
Give your employees more than just a 401(k), join the movement.