Bitcoin in 401(k)s. Too Soon?

While institutional funds are still trickling into Bitcoin, the cryptocurrency’s enthusiasts seem to have fixed their aim at another target – retirement accounts.

ForUsAll, a San Francisco-based 401(k) provider, has partnered with Coinbase Global to launch Alt 401(k), a new investing platform designed to spur investments into cryptocurrencies and other alternative investments into retirement accounts. According to a press release issued by the company, the platform is an attempt to “democratize” access to such investments for retail investors. Alt 401(k) account holders can set aside up to five percent of their portfolio for cryptocurrencies and have a choice of fifty coins available on the platform.   

ForUsAll is a small fish in an extremely big pond. Founded in 2012, the firm has $1.7 billion in assets under management and serves 70,000 employees. For context, the retirement account industry has around $22 billion worth of assets under management.

The company is funded by Ribbit Capital, a venture capital firm focused on fintech and a founding member of Libra – Facebook’s proposed 2019 cryptocurrency. It was also an early investor in Coinbase – the 401(k)-provider’s partner in the venture.   

Too Soon for a Bitcoin 401(k) Investment?  

ForUsAll is not the first company to attempt to place Bitcoin or cryptocurrencies in retirement accounts. Bitcoin IRA, which calls itself the world’s largest IRA platform for Bitcoin and cryptocurrencies, was launched in 2015 and BitIRA in 2017.  

The idea behind the ventures is to generate interest and make the cryptocurrency as widely available as possible to generate liquidity for its ecosystem. But there are three strikes against the crypto ecosystem in a retirement portfolio.

First, and most importantly, existing regulation makes cryptocurrency investments through 401(k)s difficult. It is not illegal to hold Bitcoin in retirement accounts. According to the Employee Security and Retirement Act (ERISA), 401(k) trustees, in most cases they are employers, are fiduciaries. This means that they are required to provide the best available investment choices to their employees. It also means that nonemployee owners are liable for losses and can get sued for making “inappropriate investment choices” if they provide risky investments in the menu of available options.  

Second, cryptocurrencies are volatile. Retirement savings is sensitive investing territory, one in which a conservative approach is valued over risk to multiply wealth. Numerous reports have already catalogued the price swings for cryptocurrencies and their potential to wipe out invested funds. Even ForUsAll recognizes this drawback and has limited the investment amount to up to 5% of a fund’s total holdings. The system alerts users when their crypto holdings exceed that percentage of the total. An exchange-traded fund, that tracks cryptocurrency prices, could cushion investors from direct exposure but the chances that one will be approved this year seem slim.  

Third, crypto in retirement accounts can be an expensive proposition. I’ve written earlier about the math and the substantial costs involved in holding cryptocurrencies in retirement portfolios. These costs are a function of the instrument’s nascent ecosystem in which services and products are expensive due to supply constraints. ForUsAll has not disclosed the costs involved in crypto transactions and its website limits itself to comparing transaction fees (0.5% for crypto purchases) with other providers. My guess is that there are a bunch of other costs, custody included, that the company is not willing to talk about.