Are you an employee who wants access to crypto in your 401(k), or an employer who wants to provide crypto access through your company-sponsored 401(k) plan? If so, you've come to the right place.
In this guide to crypto in a 401(k), we'll share the answers we’ve compiled to the most frequently asked questions on how to add Bitcoin and other cryptocurrencies to the 401(k). We'll walk you through what you need to know, along with the key considerations and risks.
Spoiler alert: As the first 401(k) provider to enable access to crypto in a 401(k), we’ll draw on our own experience in this guide, as well.
If you want to jump around, use these links to go straight to a specific section:
- Can I invest in cryptocurrency in my 401(k)?
- How does 401(k) crypto investing work?
- Which cryptocurrencies are, or will be, available for 401(k) plans?
- How can I add cryptocurrency to my 401(k) plan?
- Which 401(k) providers offer (or plan to offer) crypto access?
- How can employers mitigate the risks of offering crypto in the 401(k)?
Can I invest in cryptocurrency in my 401(k)?
The short answer is, unsurprisingly, "it depends."
But first, let's answer the basic question: Is it even possible to invest in cryptocurrency in a company-sponsored 401(k) plan? After all, 401(k) plans are designed for long-term investing and retirement saving. These retirement plans typically offer long-utilized, traditional investments like mutual funds, ETFs, and target-date funds.
However, the Employee Retirement Income Security Act (ERISA) does not state which specific type of investments can or cannot be included in a 401(k). Instead, the law instructs plan fiduciaries to act with prudence and diligence when selecting investment options.
So, yes - investing in cryptocurrency in a company-sponsored 401(k) plan has always been theoretically possible.
Fast-forward: Modern financial technology has transformed 401(k) plans – employers can now add cryptocurrency while still meeting their ERISA fiduciary requirements. In fact, cryptocurrency investing in the 401(k) became a reality for the first time when ForUsAll – working with Coinbase Institutional – enabled crypto access for our clients. At the time of this writing, no other 401(k) provider has enabled plan sponsors to provide 401(k) crypto access to their participants, but the ability to do so has been demonstrated.
Investing in cryptocurrency in a company-sponsored 401(k) plan has always been theoretically possible.
It's worth noting that, earlier this year, 401(k) provider Fidelity announced plans to roll out Bitcoin access in its 401(k) plans beginning in the fall of 2022. In addition, while Betterment is bringing crypto to its platform via its acquisition of Makara, Betterment at Work, Betterment’s 401(k) platform, has stated that it is taking a “wait-and-see” approach to bringing crypto to its 401(k) customers.
How does 401(k) crypto investing work?
At ForUsAll, we believe that diversification is critical to an appropriately balanced retirement portfolio, and that crypto can be a component of diversification. We also believe that investing in crypto is an option that should be considered by investors who are fully educated about cryptocurrency.
Generally speaking, there are two ways to offer crypto in a 401(k): One, as an option in the plan’s core investment menu, or two, through a Self-Directed Window, similar to a Self-Directed Brokerage Account (SDBA).
Here’s a more detailed description of each approach:
Core Investment Menu
The 401(k)’s core investment menu is typically a selection of several mutual funds with different allocations to stocks and bonds. The core investment menu is selected by the 401(k) plan fiduciaries, and generally need to be prudent for the plan overall. And plan fiduciaries need to get this right - otherwise, they risk costly lawsuits.
The problem, however, is that there may be sophisticated or higher risk investment options that could be appropriate for some employees, but imprudent for others. If a sophisticated, high risk option performs poorly, employers could get sued. For this reason, it’s increasingly rare to see industry sector funds, individual stocks, commodity funds, private equity, venture capital or cryptocurrency in a core investment menu.
The inclusion of an investment on the core investment menu carries with it the risk of liability for the plan fiduciary in the event the investment is determined to be imprudent.
And these limitations can impose a real cost for sophisticated investors or those that work with outside advisors. This is especially true when entire asset classes are excluded from the menu. In fact, these limitations could potentially result in lower returns - especially over long time horizons.
That’s where Self-Directed Brokerage Windows can come in.
Using the core menu does not require the setting up of a side account like a self-directed window does. It also provides all employees with a convenient way to invest in crypto with no extra administrative steps.
A drawback though is that it restricts variety. There’s a limit to how many selections can be included on a core investment menu before employees feel overwhelmed. A Columbia Business School research study found that 401(k) participation rates are highest when plans offer fewer than 10 investment options and as plans added more options, fewer employees invested. For crypto, that might mean you could include a crypto-based ETF or perhaps one major token, like Bitcoin, but you likely wouldn’t want to include dozens of tokens because, as mentioned, there’s a limit to how many selections can be on a core investment menu before employees feel overwhelmed.
Employers should also be aware that ERISA requires that when a plan sponsor adds an investment to their plan’s core investment menu, they make the determination that it is a prudent investment for the plan. The inclusion of an investment on the core investment menu carries with it the risk of liability for the plan fiduciary in the event the investment is determined to be imprudent. No 401(k) providers currently allow cryptocurrency on their core investment menus, but we understand that Fidelity plans on using this approach to introduce its crypto solution.
Self-Directed Crypto Window
As an alternative to including cryptocurrency in the core menu, it may be appropriate to offer it through a self-directed window. A self-directed window, like a self-directed brokerage account (SDBA) is not a Designated Investment Alternative, and is not included in the plan’s core investment menu.
With a self-directed window, an employee can open a separate account within the plan. This gives employees freedom to go beyond the choices on the core investment menu and then they can pick the funds, stocks, bonds, and cryptocurrencies they want for their portfolio (depending, of course, on what’s available with your 401(k) provider).
The benefit of a self-directed window is it gives your employees more freedom to pick the cryptocurrency investments they want. Employees must elect to use a self-directed window. This extra step shows they are willingly making the investment.
ForUsAll uses our Self-Directed Crypto Window when you decide to offer cryptocurrencies as part of a 401(k) plan.
A drawback of an SDBA or self-directed window is that if you don’t already have this plan feature you would need to spend time setting them up for your employees. This process could involve paying extra fees to the companies overseeing these accounts. However, tech-forward providers are making these options increasingly affordable and available for businesses. ForUsAll uses our Self-Directed Crypto Window when you decide to offer cryptocurrencies as part of a 401(k) plan. This Crypto Window is already part of our 401(k) – an employer need only decide whether or not to enable it for their employees.
Which cryptocurrencies are, or will be, available for 401(k) plans?
ForUsAll offers access to Bitcoin (BTC), Ethereum (ETH), Solana (SOL), Cardano (ADA), Polka Dot (DOT), and USD Coin (USDC), with more tokens to be added throughout the year. When Fidelity comes online (soon) they will be offering Bitcoin (BTC).
How can I add cryptocurrency to my 401(k) plan?
ForUsAll is currently enabling crypto in their Alt401(k). If you already have your 401(k) plan with ForUsAll, just reach out to your customer success team to activate the Self-Directed Crypto Window. If your employer doesn’t use ForUsAll for their 401(k), but you’d still like access to crypto, contact us and we’ll get in touch with your employer.
If your 401(k) provider is Fidelity, you can wait until later this year and take advantage of their new Digital Assets Account that will allow you to invest in Bitcoin.
Alternatively, if your 401(k) provider is Fidelity, you can wait until later this year and take advantage of their new Digital Assets Account that will allow you to invest in Bitcoin. Your access to, and the details of that access will be decided by your employer. If your 401(k) is with Fidelity, your employer should be able to answer your questions.
Which 401(k) providers offer (or plan to offer) crypto access?
While it’s still early days, there are already options for those who want to include crypto in their 401(k) now, or in the future: One that’s up and running (ForUsAll), one that has targeted its launch for this Fall (Fidelity), and one to keep an eye on (Betterment).
ForUsAll’s Alt401(k) is currently the only platform to offer access to cryptocurrency investments in a 401(k). In the case of ForUsAll’s crypto 401(k) solution we do not put cryptocurrency in the core investment menu. Instead, we make direct investment in crypto available via a Self-Directed Crypto Window (similar to a Self-Directed Brokerage Account), which is powered by Coinbase Institutional and is designed for sophisticated investors. Participants who decide to invest in crypto can only access that window after taking, and passing, an interactive quiz that includes comprehensive risk disclosures.
We also set a default cap of 5% for crypto allocations, and send proactive portfolio alerts when allocations exceed that range. These alerts help employees manage their crypto exposure, and can prompt them to rebalance or reduce that exposure if their position in crypto grows relative to their overall account.
401(k) contributions can be made on a pre-tax or post-tax (Roth) basis and participants investing in crypto can elect to have part of that contribution go directly to the Self-Directed Crypto Window.
In association with Coinbase Institutional, cryptocurrency is stored digitally. When cryptocurrency is stored on a device or account that is connected to the network, that storage is called a “hot wallet”. When cryptocurrency is stored on devices that are completely disconnected from any networks, that is called “cold storage.” It is not connected to a network and it is safer, because hackers can’t hack the network to gain access to it.
All cryptocurrency is held in cold storage for security. When participants request a transaction, only the amount requested is transferred to a hot wallet to execute the transaction before being moved back to cold storage.
Set to launch in Fall of 2022, Fidelity’s new proprietary offering, known as the Digital Assets Account (DAA), is said to enable employees who are comfortable with the risks and volatility of cryptocurrency to invest in Bitcoin. Unlike ForUsAll’s offering, the Digital Assets Account sits within the core investment lineup of the 401k plan, as a Designated Investment Alternative (DIA).
Fine print: A Designated investment alternative means any investment alternative designated by the plan as part of its core investment menu. This does not apply to brokerage windows, self-directed brokerage accounts, or similar plan arrangements, such as ForUsAll’s Self-Directed Crypto Window, that enable participants to select investments, at their own discretion, beyond those designated by the plan.
Unlike ForUsAll’s offering, the Digital Assets Account sits within the core investment lineup of the 401k plan, as a Designated Investment Alternative (DIA).
Details are sparse ahead of the launch, but Fidelity has indicated that employees will have access to education to help them make informed decisions, and that security for Bitcoin in the Digital Assets Account will be handled by holding the Bitcoin on the Fidelity Digital Assets custody platform. Plan sponsors who decide to offer the DAA will establish employee contribution and exchange limits into the account.
As mentioned above, Betterment is bringing crypto to its core platform via the acquisition of Makara. While Betterment at Work, Betterment’s 401(k) platform, has stated that it is taking a “wait-and-see” approach to bringing crypto to its 401(k) customers, they are worth watching.
How can employers mitigate the risks of offering crypto in the 401(k)?
One of the key considerations for employers before offering cryptocurrency in the 401(k) is to understand how they can reduce risks to participants. There are a few steps you might take to protect your employees:
1. Keep participation in crypto optional
Cryptocurrency investing is not for everyone. Don’t make cryptocurrency an automatic or required investment as part of your 401(k). Making crypto available through a self-directed window rather than as a Designated Investment Alternative in the plan’s core investment menu may help emphasize this point.
One of the key considerations for employers before offering cryptocurrency in the 401(k) is to understand how they can reduce risks to participants.
2. Consider limits for maximum crypto investments
Cryptocurrency is a volatile investment. It might play a role in a diversified portfolio but some would argue that it shouldn’t be a person’s entire portfolio. Consider setting a limit to what percentage of an employee’s 401(k) balance can go into cryptocurrency. At ForUsAll, the limit is initially 5% of a participant’s 401(k) balance, then ongoing contributions of 5%.
3. Work with an experienced 401(k) crypto provider
Your employees need education to help them understand the fundamentals of cryptocurrency investing, including the risks, so they can decide whether crypto makes sense for their portfolio. An experienced 401(k) crypto provider can provide your workers educational support for their investment decisions. They also set up guidelines and guardrails to protect your employees. At ForUsAll, participants must pass a quiz on the risks of cryptocurrency investing before they are allowed to open their account.
And there you have it
That's pretty much the current state of crypto availability in company-sponsored 401(k) plans. Hopefully this guide will give you the information you need to find the 401(k) providers who currently, or will soon, enable cryptocurrency in a 401(k).
We know how difficult it is to find good information on this new asset class being offered in company-sponsored 401(k) plans. If you’ve searched, you’ve probably found many IRA-with-crypto solutions – which is not the same thing. So, here are a few posts you may find helpful on the subject of 401(k)s with crypto:
- Crypto 401(k) benefits for employers
- Crypto 401(k) benefits for employees
- Using crypto as a 401(k) portfolio diversifier
And, if you need any further help, don’t hesitate to reach out.
Nothing in this post should be construed as a recommendation by ForUsAll, Inc., its affiliates or employees (collectively, “ForUsAll”) as a recommendation to activate a cryptocurrency window or invest in cryptocurrency. Investing in cryptocurrency can be risky and investors must be able to afford to lose their entire investment. You should consult with your own advisers before activating a cryptocurrency window or investing in cryptocurrency. ForUsAll does not provide legal, tax, or accounting advice.