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: Bitcoin in your 401(k)? Fidelity just introduced it as an option – when it makes sense, and when it doesn’t

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Bitcoin and other digital assets have caught the attention of investors for years, but it’s usually been advised against adding to retirement portfolios – Fidelity Investments might just change that. 

The Boston-based investment firm announced Tuesday it was offering a bitcoin option for the 401(k) plans it administers, though employers will get the final say on whether or not they roll that feature out to their plan participants. The product will be available to employers in Fidelity’s 401(k) lineup by mid-year, the company said. 

With so much focus on digital assets lately, and investors already utilizing these options outside of retirement plans for years, the time was right, said Dave Gray, head of workplace retirement platforms and offerings at Fidelity Investments. “Investors’ expectations and interest in digital assets like bitcoin and others, even outside retirement accounts – that interest continues to grow,” Gray said. 

These investments are becoming more “baked into the financial system of today and the future” – for trading as well as payments, he added. 

See: Does bitcoin belong with your 401(k)?

In just a few years’ time, the number of investors dabbling in cryptocurrencies has grown substantially. About 8% of households used crypto in 2020, but that figure jumped to 22% in 2021, representing 25 million households, according to research firm Hearts & Wallets. About 22% use cryptocurrencies for payments, 66% for trading and 12% for both – a clear indication of the interest in digital assets as investments, said Laura Varas, chief executive officer of Hearts & Wallets. 

In the research, investors said they used cryptocurrencies because the “high volatility creates opportunities to make money trading.” Younger investors, and male investors, are more likely to use cryptocurrencies than their older, or female, counterparts, the data showed. 

“Consumers are doing this anyway,” Varas said. “So it is positive that they’re going to be helped to do it in a safe way.”

Fidelity is establishing a limit on how much of a 401(k) plan can be invested in bitcoin – no more than 20%. Employers will then be able to adjust that limit, perhaps choosing 5% or 10%, but no more than 20%, Gray said. Investors can use cryptocurrencies in their 401(k) plan through a Digital Assets Account, which holds bitcoin and other short-term money market investments, Fidelity said.

Cryptocurrencies in employer-sponsored retirement accounts, such as the 401(k) plan, are still relatively new, and the Department of Labor, which oversees employers’ retirement plans, has issued a warning in offering them. Employers are held to the fiduciary standard as plan sponsors, which means they must act in their employees’ best interests when choosing which investments to include in their 401(k) plans. The evaluation includes core investment earnings, higher-than-necessary expense ratios and fees and what constitutes as “unreasonably risky,” said Wendy Von Wald, fiduciary product manager at Travelers. 

Also see: Bitcoin unable to hold gains as Fidelity plans to let investors put the crypto in 401(k) accounts

“Especially with cryptocurrency, there would have to be an additional level of scrutiny,” Von Wald said.

In March, the DOL told 401(k) plan sponsors to exercise caution when including cryptocurrencies in their 401(k) plans. “Today’s announcement reminds plan fiduciaries of their important role in selecting investment options for 401(k) plan menus,” Ali Khawar, acting assistant secretary of the Employee Benefits Security Administration, said at the time. “At this stage of cryptocurrency’s development, fiduciaries must exercise extreme care before including direct investment options in cryptocurrencies.” 

Still, investors are taking digital assets more seriously – and some want these investments in their retirement accounts. There are already platforms that provide access to cryptocurrencies in IRAs, for example. 

Many financial advisers have said if investors do opt to put a portion of their portfolio into these assets, they should do so carefully and with the expectation that they may lose the money (one reason why some people might decide against using their retirement savings to invest in this). But others have noted that these investments can provide high returns in the future, and should be treated like any other risky asset in a portfolio – held at a minimum position, for example. 

Fidelity will also include educational resources for plan participants to make “informed decisions” and include “speedbumps to make sure they understand the risk and volatility” if they decide to move money over to these investments, Gray said. 

“It is smart that Fidelity is setting the guardrails,” Varas said. The 401(k) plan is often the first – or at least the second – introduction to investing for young savers, she added. 

“Even though the 401(k) is not the ideal place to invest in crypto, it is the best way to reach broad swaths of young investors and introduce them to investing where they understand more fully the whole set of opportunities to them,” Varas said.

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