A growing number of American investors are ready to add bitcoin to their 401(k) investment plans – but they’re unable to do so.
Why can’t we buy bitcoin using our 401(k) plans? Will it soon be possible to buy bitcoin within your 401(k)?
According to some reports, bitcoin 401(k) plans are just around the corner – although the industry needs to cross some major hurdles before we start seeing widespread bitcoin 401(k) products.
As explained by Kiplinger, there are a number of issues preventing bitcoin and other cryptocurrencies from being added to 401(k) plans.
Currently, no mutual fund, collective investment fund, or ETF in the United States has a fund exclusively invested in bitcoin or cryptocurrencies. You’re free to add all of these types of funds to your 401(k), although you’re not able to add a dedicated crypto fund to your investment portfolio.
The vast majority of 401(k) plans use these types of funds to make daily trades for participants. Until we see a dedicated bitcoin ETF or mutual fund, bitcoin will not be a mainstream investment option.
It is possible to purchase bitcoin futures on certain exchanges. However, you can only access these exchanges using specific brokerage accounts. They’re not accessible to the general public.
In addition, many plan sponsors that offer brokerage accounts restrict purchases to mainstream investments like mutual funds, ETFs, and the major stock exchanges. They do this for simplicity’s sake: it’s easy to make trades like this on behalf of clients. Now consider how this could work with buying or selling bitcoin.
Here’s the issue, as explained by Kiplinger:
“Many plan sponsors that offer brokerage accounts restrict purchases to mainstream investments, such as mutual funds, ETFs and the major stock exchanges. Taking this down a different road, bitcoin owners store and track the bitcoin in wallets. A plan sponsor generally holds one position of each security on behalf of all participants. That means someone must hold the password for the wallet, which could be the plan sponsor or their selected recordkeeping service provider.”
This introduces a number of difficulties when trading between a mutual fund and a bitcoin wallet.
Another issue is that the markets never close on bitcoin – like they do with mutual funds and ETFs. There is also no single recognized price or trading price. You can’t check a single market and get a definitive price on bitcoin.
Bitcoin Isn’t Regulated, And 401(k) Sponsors Have Fiduciary Responsibilities
A 401(k) fiduciary is required to act in the best interest of plan participants. They have a responsibility to provide safe, well-researched, regulated investments to participants.
“The question a fiduciary must ask,” explains Kiplinger in their report, “Do they want to permit investments that aren’t regulated in any way, shape, or form by any government.”
You could argue that bitcoin futures exchanges are regulated – and they are – although the underlying asset, bitcoin, is far from regulated.
Bitcoin Isn’t Protected By The FDIC Or SIPC
There’s also the issue of FDIC protection. Traditional assets are protected by the Federal Deposit Insurance Corporation (FDIC). FDIC protects your bank or money market accounts. If your investment in a bank or money market account goes missing, gets hacked, or disappears for whatever reason, then your funds are protected by the FDIC.
Similarly, your investments in brokerage accounts or mutual funds are protected by the Securities Investor Protection Corp, or SIPC.
With bitcoin, there’s zero protection for investors. If your bitcoin gets lost, hacked, or stolen, then you have limited recourse.
If you forget your bitcoin “password”, then you can’t call the customer service helpdesk. You can’t reset your password. If you lose access to your private keys, then your bitcoin is lost forever. People can lose – and have lost – millions of bitcoin for precisely this reason.
Fund managers would need to decide if 401(k) participants are allowed to have their own wallet – or if all funds are managed under a single wallet.
You Can Already Purchase Bitcoin Through A Self-Directed IRA
If you want to buy bitcoin in a registered investment vehicle in the United States, then you can already do so by purchasing a self-directed IRA. You won’t be able to purchase bitcoin as part of your company’s 401(k), but you’ll be able to purchase it using your own self-directed investment account.
Bitcoin 401(k) Conclusion
Ultimately, bitcoin has some major hurdles to cross before it can be added to 401(k) plans.
The biggest hurdle is the issue of fiduciary responsibility: sponsors of 401(k) plans face potential litigation from participants related to their fiduciary responsibility. Sponsors are reluctant to offer cryptocurrencies as a 401(k) investment due to their volatility, lack of risk analysis, lack of regulation, and the hassle factor involved in securing cryptocurrencies. All of these issues could expose sponsors to litigation.
All of this means that we may have to wait for a major bitcoin ETF to launch before we see bitcoin 401(k) investment options.