Is Your 401(k) Going Digital?

It might be. The pro-crypto Trump Administration has rescinded Biden-era guidance to employers to exercise “extreme caution” when considering the addition of cryptocurrencies, including meme coins and NFTs (non-fungible tokens), within 401(k) retirement plans. Most private retirement plans are regulated by the Department of Labor and have a history of relatively conservative investments due to fiduciary rules, which explains the preponderance of target-date funds in 401(k) plans.

In rescinding previous restrictions, the Trump DOL fully annulled prior guidance, arguing that the “extreme caution” standard was not mandated by the Employee Retirement Income Security Act (ERISA). The DOL is now returning to a neutral stance on investment types, neither encouraging nor discouraging the inclusion of crypto assets in 401(k) plans.

By taking this action, employers are now permitted to offer a broad range of digital assets as part of their 401(k) investment menu.

Not so fast!

That sounds very speculative and potentially dangerous to retirement investors, and this decision has drawn significant criticism. However, the fiduciary responsibility of employers has not been removed. Despite the change, employers and other plan fiduciaries still retain their ERISA-mandated duty to act prudently and in the best interest of plan participants. Employers and fiduciaries could face lawsuits if investors suffer significant losses due to imprudent investment choices.

The Implications for 401(k) Investors

Assuming your employer adds cryptocurrencies to the 401(k) investment menu, you will have some decisions to make. We would not expect many digital assets to actually be added, and the prime candidates are the two most senior cryptos: Bitcoin and Ether. Although relatively mature, both are volatile and speculative compared with more traditional assets. However, Bitcoin and Ether are now both traded on spot ETFs (that is, at the spot price) and are enjoying wider institutional acceptance as an asset class.

Bitcoin is often referred to as ‘digital gold’, but we see a key difference. Gold has been money for thousands of years and plays a central role in the reserve assets of central banks. The same cannot be said for Bitcoin. Our key litmus test is whether central banks use crypto, specifically Bitcoin, as a reserve asset. If and when they do, Bitcoin becomes money in a very real sense. We are not quite there yet, but we appear to be getting very close.

Our Advice

If 401(k) plans offer any cryptos at all, we would expect it to be a very limited menu, with Bitcoin being the first choice and the possibility of including Ether as well. If your employer offers Bitcoin in your 401(k), we suggest that you dip your toe into the water. We certainly don’t want to see anyone making a significant allocation to Bitcoin, but if you want to be in the game, a small position may be appropriate. If Bitcoin goes to zero, it will have relatively little impact on your retirement. In other words, manage the risk. If Bitcoin continues to be a huge hit, you still get a piece of the pie, albeit a smaller one.

After years of 401(k) investors being protected by limited investment menu options, investors will now need to be very disciplined because the outcomes here can range from very good to very poor, and you should expect some extreme volatility along the way. Yes, there are risks, but nothing that cannot be managed. Talk to us before you get started.

Have a great week!

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Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

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By: Adam