Crypto in a 401(k): Benefits to Employees

Crypto in a 401(k): Benefits to Employees

Many people hesitate to incorporate new or higher risk assets, such as cryptocurrency, into their 401(k) plan designs. However, some economists actually recommend that investors place small percentages of their portfolios into higher-risk assets. The key, as with any investment, is diversification, balance, and careful risk management. Allowing your staff access to cryptocurrency as part of a balanced 401(k) portfolio could have tangible benefits for your employees’ abilities to grow their nest eggs.

In particular, cryptocurrency could serve as a unique portfolio diversifier. When properly balanced, cryptocurrency in a 401(k) may bring unique savings benefits to retirement investors. Here are just a few of the ways cryptocurrency in a 401(k) could benefit your workforce, if allocations are kept small and balanced.

Tax Savings

The 401(k) has features built into it that allow participants to pay less tax than they would on retail and other investments. In particular, investors can maximize their tax savings by using what are known as Roth contributions, or after-tax contributions. A Roth contribution is one where an investor pays full taxes on it when contributing, and can then withdraw it at age 59½ with no further taxes due.

Cryptocurrency on a typical trading platform is subject to heavy capital gains taxes when an investor goes to sell, which can be taxed at a rate of up to 37% under current tax laws. But cryptocurrency held or traded in a Roth 401(k) account would accrue zero capital gains taxes, no matter how much the balance increases by the time an investor retires. By incorporating access to cryptocurrency, your employees can take advantage of these built-in features of the 401(k) when managing their crypto investments.

Cryptocurrency held or traded in a Roth 401(k) account would accrue zero capital gains taxes, no matter how much the balance increases by the time an investor retires.

Increased Risk-Adjusted Returns

Cryptocurrency is known to have higher volatility levels than traditional investments like stocks and mutual funds, but it also has a higher risk-adjusted return rate. In fact, a study by FTSE Russell even showed that increasing the allotment of Bitcoin in a model portfolio from 2.5% to 5% resulted in an excess return that rose from 3.2% to 6.4%, without meaningfully increasing risk. Despite the volatility levels of cryptocurrency, risk levels did not increase when allocations were kept small. It was also found that the portfolios that contained cryptocurrency allocations performed better across the board than those that didn’t. By capping crypto allocations at a small amount, and using a self-directed window rather than incorporating this asset into the core lineup, sponsors can allow their employees additional opportunities for diversification  without risking their whole portfolios.

However, it’s important to note that while academic literature and simulations have compelling information about potential gains, cryptocurrency is a volatile asset and should be approached with caution and consideration. While some investors have seen increased returns when incorporating cryptocurrency into their portfolios, others have experienced significant losses during sharp, sudden downturns in crypto markets. Most experts recommend mitigating this risk by keeping crypto allocations small, such as a Yale study which recommends allocations under 6%.

Because cryptocurrency behaves differently in markets than traditional assets do means it can be a strong potential portfolio diversifier.

Portfolio Diversification

Research indicates that cryptocurrency has an historically low correlation to traditional assets. This makes it a strong potential diversifier because it means that cryptocurrency behaves differently in markets than traditional assets do. A team at Yale’s National Bureau of Economic Research compared the performance of cryptocurrency to stocks, and found no strong correlation between how the two markets performed. Studies at Western Sydney University and others have found similar results to suggest that because of its low historic correlation to traditional assets, crypto could be an effective portfolio diversifier.

Investment Control

A feature that many crypto investors like is how much control they have over their investments, from which coins they invest in to when they make trades. Cryptocurrency is traded on public exchanges that are accessible any time, without the need for brokers. Considering how little control many 401(k) accounts offer to participants, cryptocurrency access could give employees the chance to make crucial decisions about their own assets. This sense of empowerment may encourage your workforce to feel more committed to their own portfolio management, and could even boost morale.

ForUsAll’s new 401(k) plan will be the first to feature secure access to cryptocurrency.

How Can I Get Started?

ForUsAll’s new 401(k) plan will be the first to feature secure access to cryptocurrency. Though plan sponsors have to add this investment option to the plan, participants who use the option are in control of their crypto contributions and investments. In order to protect investors and maintain diversified portfolios, ForUsAll has capped crypto allocations at 5% of the initial balance, plus 5% of ongoing contributions.

The self-directed crypto window is powered by Coinbase Institutional, and it allows participants to trade crypto assets within their 401(k) accounts. As cryptocurrency adoption rates continue to climb, and more participants use retail accounts to trade it, sponsors who incorporate this asset into their 401(k)s early can demonstrate their commitment to forward-thinking plan design and their employees’ interest in cryptocurrency as an investment option.