Given Bitcoin’s meteoric rise and enduring popularity, many investors might be interested in investing in cryptocurrencies as part of their portfolios. Nowadays, retirement savers can even take advantage of tax-leveraged accounts like self-directed IRAs and invest in cryptocurrencies and other alternative investments.
However, the U.S. Department of Labor (DOL) recently released a report recommending against such an investment move. Issued right as President Joe Biden has set the foundation for regulation of digital assets like cryptos, the DOL report cautions that cryptocurrencies may not be an appropriate choice for your retirement plan.
A financial advisor could help you plan for retirement and determine if investing in cryptocurrencies aligns with your financial goals. Find a qualified advisor today.
U.S. Department of Labor Issues Compliance Warning
Partially in response to reports that investment management firms might be marketing cryptocurrencies as an option within your retirement portfolio, the DOL has issued a stark warning against investing in cryptos with your 401(k) funds.
The recommendation was issued as part of a compliance report, wherein the DOL reiterated that defined contribution managers have a fiduciary responsibility to choose prudent investments for their participants. The Department cautioned “extreme care” before adding crypto options to a 401(k) plan’s investment menu.
The U.S. Supreme Court recently ruled that “even in a defined-contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.”
As a result, even if you were interested in adding cryptos to your defined contribution plan, plan managers should not be offering the option if they do not determine the investment to meet minimum risk requirements. To do otherwise is a serious breach of fiduciary duty.
Why Not Include Cryptos in Your Plan?
The problem with cryptos and other digital assets is the lack of regulation and policies regarding their existence and use. Investing in such assets can expose your retirement funds to significant risks, and betting your future retirement on unregulated assets could easily end in disaster.
For example, the DOL warns that cryptocurrencies are subject to extreme price volatility. At this stage in their development, cryptos often experience speculation and valuation issues, which lead to wild price swings. Extreme volatility can be devastating to retirement savings and highly problematic for retirees who depend on these monies for daily living.
Another issue with offering cryptos in a retirement plan is the difficulty in evaluating them as an asset. Even experts have trouble separating real cryptocurrency value from speculative hype, and retirement savers may interpret including a crypto option in a 401(k) menu as an endorsement by the plan manager. Currently none of the proposed models for valuing cryptocurrencies meet the same rigorous accounting standards that are used for equities or debt analysis, so oftentimes a crypto’s value is up in the air.
Digital assets like cryptocurrencies are not held like traditional investments either. Instead, cryptos are often held in digital computer wallets and may be exposed to hacking and theft. Ever hear of the Welshman who threw away his hard drive holding $500 million in Bitcoin? That’s yet another problem.
What Retirement Savers Can Do Instead
Currently there is no regulatory environment or national policy regarding cryptocurrencies. To minimize your exposure to crypto risk, the only safe way at the moment is to avoid investing your 401(k) funds in digital assets.
But if you do decide to invest in cryptocurrencies, there are a couple steps you can take to minimize potential damage and still benefit. First, it might be a wise move to keep your retirement funds apart. Defined contribution plans often follow asset allocation guidelines to help you save for your retirement, so make sure to keep your retirement investments aligned with your risk tolerance goals.
If you’d like to capture some of the potentially-high returns for crypto investments, try investing through your regular brokerage account. Putting some money into a crypto exchange-traded fund like the Bitcoin Strategy ETF offers investors exposure to Bitcoin without having to buy the digital coin directly.
Another option is to open an account with a cryptocurrency exchange like Coinbase, Kraken or Binance.US. These exchanges allow you to buy currencies like Bitcoin and Ethereum with your debit card, and if you plan on holding the crypto coins for a while, you also have the option of safeguarding your investments in their digital vaults.
Bottom Line
The U.S. Department of Labor recently issued a warning against using retirement funds for cryptocurrency investments. Defined contribution plan managers are held to strict fiduciary standards, and the DOL cautions that the lack of digital asset regulation makes it difficult for fiduciaries to properly analyze how crypto issuance, investments or trading might affect their 401(k) plan participants.
Retirement Planning Tips
- Not sure what investments and strategies will set you up for a smooth retirement? For a solid, long-term financial plan, consider speaking with a qualified financial advisor. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s free retirement calculator to get a good first estimate of how much money you’ll need to retire.
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