Someone would have to be living under a rock for the last year or so not to have noticed all the talk about Bitcoin and other cryptocurrency. The values have fluctuated quite a bit, but all the press makes it sound like cryptocurrencies are a great investment that can generate significant returns.
Is it possible to add Bitcoin or other cryptocurrencies as an investment option in our 401(k) plan?
We should start by saying that we are not aware of any plans that have taken this step, even though some have inquired. That is probably because saying that this is a bit of a legal minefield is putting it mildly.
Let’s take a quick step back to add some context. Selecting options for a plan investment menu is a fiduciary function, and plan fiduciaries are always obligated to act in the best interest of plan participants as a whole, not just based on what a couple of them might prefer. So, when considering cryptocurrency as a plan investment option, fiduciaries must determine whether such a move would truly be in the best interest of their participants.
Most “traditional” investment options come with some sort of regulatory oversight and/or protection. The FDIC oversees cash and some cash equivalents; the SIPC has brokerage accounts and mutual funds; and the SEC and FINRA watch investment professionals who work with plans.
Cryptocurrencies, on the other hand, are completely unregulated in the United States and abroad. There isn’t even agreement on what cryptocurrencies are – Are they true currency? Are they collectibles or some other form of property? Are they securities? The IRS treats them as property for tax purposes, but the answer might vary depending on who is asking and what the context is.
Plan assets must be held in trust (controlled by a trustee) that is subject to U.S. jurisdiction, and that may present one of the biggest challenges. Cryptocurrencies do not exist in tangible form; they are simply numerical entries in an electronic blockchain and are held in digital wallets. If a user loses the login credentials for his or her wallet, everything in it is lost forever. There is no way to retrieve it…period. That begs the question as to who would own or control the digital wallet for plan investments in Bitcoin.
With traditional investments, the individual participant does not own the actual underlying securities. Rather they are entitled to a monetary benefit that is equal to the value of the investments that the 401(k) plan holds on their behalf. Based on that, it wouldn’t make sense for participants to control the wallet(s), but that means the plan trustee or other fiduciary must do so. Imagine the lawsuits that would ensue if the plan trustee or investment advisor was to misplace the access credentials?!
Even if we were to concede that allowing participants to control their own wallets was a logistical option, one could certainly argue that it is not in the participants’ best interest to give them control of a plan asset that could essentially evaporate due to a misplaced password.
What Could the Future Hold?
One option that may become available in the future is to offer a broader investment option, such as a mutual fund, that focuses on cryptocurrency investing. That would provide the government oversight and address the trust/wallet issue at the plan level. However, there are not currently any mutual funds, collective investment funds or ETFs in the U.S. that focus on cryptocurrencies.
And we haven’t even scratched the surface on conversations about whether or not the extreme volatility associated with cryptocurrency would make fiduciary sense for a retirement plan whose participants are more generally focused on longer-term investing.
For all of these reasons, most plan fiduciaries are probably unlikely to go down this road at present. Those who do want to consider Bitcoin or other cryptocurrencies as a plan investment option would be well-served working with an experienced ERISA attorney to help navigate this minefield.
For more information on Bitcoin as a plan investment option, check out DWC partner Keith Clark's article for Kiplinger here.