Fidelity Is Offering Bitcoin in 401(k)s: What Retirement Savers Should Know

More investors will soon be able to add bitcoin to their 401(k) accounts.

Fidelity Investments announced plans Tuesday to begin offering bitcoin as an investment option in its 401(k) retirement plans starting later this year.

It’s a big move for Fidelity, which oversees more than $2.7 trillion in 401(k) plan assets — and a significant milestone in the mainstreaming of cryptocurrency.

The retirement giant said employer interest spurred the move.

“There is growing interest from plan sponsors for vehicles that enable them to provide their employees access to digital assets,” said Dave Gray, head of workplace retirement offerings at Fidelity Investments.

More retail investors also see bitcoin playing a bigger role in their long-term investment strategy.

According to a March 2022 survey by The Penny Hoarder, 69% of crypto investors said they would invest some of their retirement funds into cryptocurrency if given the opportunity.

Fidelity will give the 23,000 employers it works with the option to add so-called digital assets accounts to their 401(k)s, and workers will pay between 0.75% and 0.90% in annual fees for these special bitcoin accounts.

Employers will also set limits on how much of their savings a participant can earmark for bitcoin, up to a 20% cap.

Chris Kline, COO and co-founder of Bitcoin IRA, said Fidelity’s announcement could trigger “a domino effect” among mainstream retirement plan providers and custodians.

“As consumer demand grows, more providers will jump in,” said Kline, whose company began offering cryptocurrency within individual retirement accounts back in 2016. “It’s going to take a powerhouse like Fidelity to get other big players on board.”

Consumers have been able to invest in cryptocurrency using self-directed IRAs for years, but Fidelity’s move streamlines the process for workers, who will now be able to take advantage of employer contribution matches and automatic payroll deductions.

Supporters also believe the value of bitcoin will increase as a new wave of investors pours into the cryptocurrency market.

“Trillions of dollars are wrapped up in 401(k)s that previously couldn’t be invested in crypto,” Kline said. “It could serve as a major rally for bitcoin’s price later this year.”

Enthusiasts may be bullish, but bitcoin remains highly controversial as a long-term investment.

Bitcoin’s price is a rollercoaster ride: It’s down 27% from this time last year and the digital asset is known to fluctuate by 5% plus or minus on any given day.

Many financial experts are skeptical about its place in 401(k)s and other retirement accounts due to its risk and volatility.

“Cryptocurrency is a speculative asset, and therefore not a sound long-term investment,” said Madeline Hume, a senior research analyst at Morningstar. 

Regulators have also signaled disapproval about making cryptocurrency available to 401(k) participants.

In March, the Department of Labor asked plan fiduciaries to “exercise extreme care” before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu.

“These investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft and loss,” the DOL noted in its March 20 letter.

This could make employers hesitant to offer bitcoin as a 401(k) option to workers, even if it’s available.

“The real test will be whether plan sponsors choose to sign up for this type of offering,”  Hume said. “They’re the ones that will actually be on the hook if it goes south.”

What to Consider Before Buying Bitcoin With Your 401(k)

Should you add bitcoin to your 401(k) or other retirement accounts? And what should you know before investing?

First, experts say you shouldn’t put cryptocurrency in your retirement account just because you can. You need to make sure it fits in with your long-term financial goals.

A few reasons people hold bitcoin is because they see it as a store of value like gold, view it as a hedge against inflation or an asset class traditionally uncorrelated with the stock market.

That could be appealing to some investors, with stocks down 12% this year, inflation at a 40-year high and concern over an impending economic recession mounting.

Some people believe in the blockchain technology bitcoin pioneered. Others simply want to diversify their portfolio with a new — yet increasingly mainstream — asset.

Understanding why you want to invest can help keep you focused on your goals instead of being pulled in by a price drop or breaking news.

You should also consider how much you want to invest.

The closer you get to retirement age, the less risk you generally want to take with your portfolio. That’s because you have fewer years to recoup money if your investments tank.

“If I’m very close to retirement and bitcoin crashes 10% to 20%, that’s really bad if I need to withdraw money from that account in the next year or so,” said Adam Blumberg, a certified financial planner and founder of Interaxis, a cryptocurrency education platform.

So younger investors (35 and younger) have longer investing time horizons — which can make bitcoin an appealing 401(k) prospect.

“Having (bitcoin) in a retirement account by definition makes it a long-term investment,” Blumberg said.

But deciding whether to invest in cryptocurrency also depends on your own personal risk tolerance.

For the average investor, this can mean allocating no more than 5% of your portfolio to a volatile asset like bitcoin.

People with extremely high risk tolerances may go up to 10% or even 20%, while conservative investors may not exceed 1% or 2%.

Finally, it’s essential to have a secure financial foundation before you allocate 401(k) funds to cryptocurrency. Having a cash emergency fund and minimal debt is just as important as creating a clear investment plan.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.