If you’re thinking of adding cryptocurrency (or “crypto”) to your qualified retirement plan or IRA, this article will give you a bunch of reasons why you should seriously reconsider your thinking.
Technically, cryptocurrencies, like Bitcoin, Ethereum, or many others, are not specified as a prohibited investment in retirement plans. But this article is an opinion piece; and with that in mind, here are 7 reasons why crypto is a terrible option as an investment inside a qualified retirement plan or IRA.
Department of Labor (DOL) Compliance Assistance Release 2022-01
This release makes it clear that the DOL has serious concerns about exposing a 401(k) plan’s participants to investments in crypto, or products whose value is tied to crypto. The Employee Benefits and Security Administration (a division of the DOL) expects to conduct an investigative program (i.e., audits) aimed at plans that offer investment in crypto and related products, and “take action” to protect the interests of plan participants. DOL audits are often rigorous and can result in large financial penalties to plan fiduciaries.
Crypto is a volatile and speculative investment
The SEC has cautioned that crypto is highly speculative. Crypto has been subject to extreme price fluctuations. These fluctuations may be as a result of difficulties in valuing crypto, fictitious trade reports, or theft and fraud. Extreme volatility can have a devastating effect on plan participants, especially those close to retirement. Participants unhappy with investment results may decide to take legal action against plan fiduciaries.
Plan participants need to make informed investment decisions
Crypto is very different from typical 401(k) plan investments, which typically include mutual funds and/or ETFs investing in stocks, bonds, and cash. Participants are much less likely to have sufficient knowledge, or have the technical expertise to make informed decisions, about crypto. By including crypto as an investment option, plan fiduciaries are effectively telling participants that they have approved it as a prudent option.
Custodial and recordkeeping concerns
Crypto is not held like traditional plan assets in a trust or custodial account. With some crypto, simply forgetting a password can result in loss of the asset forever. Some methods of holding crypto can be vulnerable to theft and hackers.
Valuation concerns
There are concerns about the reliability and accuracy of crypto valuations, which have been described by experts as “complex and challenging.” Crypto market intermediaries may not adopt consistent accounting treatment and may not be subject to the same reporting and data integrity requirements that apply to more traditional investments.
The regulatory environment is evolving
Plan fiduciaries will need to decide whether crypto meets regulatory requirements that apply to plan securities. For example, the sale of some crypto could constitute the unlawful sale of unregistered securities. The Financial Industry Regulatory Authority (FINRA) has cautioned that some crypto has been used in “illegal activity, including drug dealing, money laundering, and other forms of illegal commerce.” This could result in problems for investors, for example, authorities could shut down or restrict the ability to use or trade that investment.
Executive Order regarding crypto
On March 9, 2022, President Biden signed an Executive Order that directed numerous Federal agencies to crack down on digital assets, including popular crypto, and to study the potential development of a Central Bank Digital Currency (CBDC). Since the Order was issued, much work has been done in this area, which could dramatically affect current crypto markets.
Of course, there are benefits to society that can arise when many of the current problems are straightened out. And some investors have had very large returns on their crypto investments. However, the above concerns should give pause to any fiduciary who is considering allowing crypto as an investment in a qualified retirement plan.