Fidelity to allow retirement savers to put bitcoin in 401(k) accounts

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Employees won’t be able to start adding cryptocurrencies to their nest eggs right away, but later this year, the 23,000 companies that use Fidelity to administer their retirement plans will have the option to put bitcoin on the menu. The endorsement of the nation’s largest retirement-plan provider suggests crypto investing is moving further into the mainstream, but it remains to be seen whether employers will embrace it for their workers.

Fidelity’s move comes a month after the Labor Department expressed concerns about including cryptocurrencies in retirement plans. It is also an uneasy time for the stock market, with the S&P 500 down almost 10% this year in part due to rising interest rates. Bitcoin is notoriously volatile and has lost more than 40% of its value since its November high.

“There is a need for a diverse set of products and investment solutions for our investors,” said Dave Gray, head of workplace retirement offerings and platforms at the Boston-based company. “We fully expect that cryptocurrency is going to shape the way future generations think about investing for the near term and long term.”

Under the plan, Fidelity would let savers allocate as much as 20% of their nest eggs to bitcoin, though that threshold could be lowered by plan sponsors. Mr. Gray said it would be limited to bitcoin initially, but he expects other digital assets to be made available in the future.

Crypto investing has been virtually nonexistent in 401(k) plans to date. One small company that caters to smaller 401(k) plans is allowing workers in some of the plans it administers to invest up to 5% of their 401(k) contributions in bitcoin and some other cryptocurrencies.

Fidelity’s embrace of bitcoin could prompt wider acceptance among employers.

“We have seen growing and organic interest from clients,” especially those with younger employees, Mr. Gray said, adding that “a number are in the evaluation process” from a wide spectrum of industries.

The company administers plans with more than 20 million participants and $2.7 trillion in assets-under-administration. Fidelity also has a growing presence in the cryptocurrency business, including a trading and custody platform it launched in 2018 that caters to hedge funds and other sophisticated investors.

Fidelity’s move comes at a time of heightened interest in digital currencies. Fidelity estimates that about 80 million U.S. individual investors own or have invested in digital currencies. Some institutional investors, including some U.S. university endowments, have reportedly invested in cryptocurrencies or funds that buy them, or took stakes in companies in the fast-growing industry.

Yet significant obstacles could block bitcoin’s wide adoption on 401(k) menus. The U.S. Labor Department, which regulates company-sponsored retirement plans, published guidance on March 10 cautioning employers to “exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu,” a department news release says.

Employers offering cryptocurrencies should expect regulators’ questions “about how they can square their actions with their duties of prudence and loyalty” under U.S. pension law, the department said.

Ali Khawar, acting assistant secretary of the Labor Department’s Employee Benefits Security Administration, wrote that “at this early stage in the history of cryptocurrencies,” the department “has serious concerns about plans’ decisions to expose participants to direct investments in cryptocurrencies or related products, such as NFTs, coins, and crypto assets.”

Fidelity, along with various trade groups that represent the financial-services industry, wrote letters calling on the Labor Department to withdraw the guidance, according to Mr. Gray and industry lawyers.

Some predict employers will steer clear of cryptocurrency in 401(k) plans.

Michael Kreps, a principal at Groom Law Group, who specializes in pension law, said the Labor Department’s guidance has likely had a chilling effect on “any conversations that were happening” with employers regarding adding cryptocurrency investments to 401(k) menus. A continuing trend of 401(k) fee litigation also creates “a huge incentive for employers not to take risks with the 401(k),” he said.

Lew Minsky, president of the Defined Contribution Institutional Investment Association, a research and advocacy organization for investment managers, consultants and others in the 401(k) industry, said he isn’t aware of any plans by his organization’s members to make cryptocurrency available. “There is too much volatility,” he said.

Companies have shown little interest in letting their employees rely on cryptocurrency for their retirement security. About 2% of the 63 employers in a recent Plan Sponsor Council of America poll said they would consider adding cryptocurrency to their 401(k) menu.

Proponents of adding a small dose of cryptocurrency to a portfolio say that it can raise expected returns without increasing overall risk. Some believe crypto can serve as a hedge against inflation.

Mr. Gray said workers at companies that sign up for the new offering can elect to transfer up to 20% of their account balances into a digital assets account that holds bitcoin and uses Fidelity’s institutional trading and custody platform. Employees can also invest up to 20% of each payroll contribution in bitcoin, though employers can impose lower caps.

Participants who invest in bitcoin will encounter pop-up boxes with educational information on crypto when they log into their online accounts. When the balance in bitcoin holdings exceeds 20% of a portfolio’s value, the employee wouldn’t be able to transfer additional sums to the account from other investments in the 401(k) plan; the employee can continue to make payroll contributions. About 5% or less of the bitcoin account will be held in a short-term money-market fund to provide liquidity to facilitate daily transactions. Mr. Gray said the fees on the account will be between 0.75% and 0.9%, depending on the client, not counting trading costs.

Fidelity declined to say whether it has plans to incorporate digital assets into its target-date funds. Those funds serve as default investments for employees who are automatically enrolled in 401(k) plans and attract the lion’s share of new contributions.

ForUsAll Inc., a 401(k) provider, announced last year a deal with the institutional arm of Coinbase Global Inc., a leading cryptocurrency exchange, that will allow workers in plans it administers to invest up to 5% of their 401(k) contributions in bitcoin, ether, litecoin and others via a self-directed digital asset window. Founded in 2012, ForUsAll provides automated 401(k) administration, menus of low-cost mutual funds and access to human advisers.

Fidelity’s interest in cryptocurrencies began nearly a decade ago, when Abigail Johnson, now chairman and chief executive, began to hold weekly internal meetings to discuss digital assets and blockchain technology. The firm started mining bitcoin in 2015. Later, it added a link on retail customers’ accounts to Coinbase, the crypto exchange, to track their holdings. In 2020, it opened its own crypto fund for wealthy customers.

—Justin Baer contributed to this article.

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