In late April, the retirement giant Fidelity Investments surprised the broader financial world when it announced plans to integrate Bitcoin into its 401(k) retirement offering. The company said that people whose employers allowed it would be able to invest as much of one-fifth of their 401(k) retirement savings into the controversial asset class.
The news set the financial planning industry abuzz, according to Cristina Guglielmetti, a financial planner based in Brooklyn, who called it a potential “game changer” for the retirement industry. Fidelity was not the first provider to offer a retirement crypto allocation. But with $2.4 trillion under its control, more than three times its closest competition, Fidelity is by far the largest holder of 401(k) assets in the country, according to a 2021 report by Plansponsor, an organization that tracks the retirement industry. And now it was opening up those American retirement savings to the world of cryptocurrency.
Crypto advocates quickly cheered the news. Anthony Scaramucci, the former White House Director of Communications-turned-Bitcoin devotee, wrote on Twitter that the importance of Fidelity’s announcement could not be “underestimated.” The company, he wrote, was “about to do for bitcoin what it did for stocks starting in the 1980s” and “swell demand.”
Matt Hougan, the chief investment officer at the crypto asset manager Bitwise, told Motherboard that Fidelity’s announcement could be viewed as a critical moment in Bitcoin’s societal “normalization.”
“For the past decade, Bitcoin has been on a path from being a fringe asset, owned originally by cyber punks and technologists, to a mainstream asset, owned by increasingly a set of professional investors, including some of the largest institutions in the world,” said Hougan, who called Fidelity’s announcement “another milestone along that journey.”
In Washington, D.C., the reaction within the Department of Labor was less sanguine. One month earlier, Ali Khawar, the acting assistant secretary for the Employee Benefits Security Administration, which is tasked with regulating company-sponsored retirement plans, had released compliance assistance stating he had “serious concerns” about any inclusion of cryptocurrencies in U.S. retirement plans and urging plan providers to “exercise extreme care before” they did so.
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Over the last four decades, the 401(k) market has become the bedrock of the U.S. retirement system, largely replacing the pension system that came before it. In 2019, according to the Labor Department, roughly 91 million Americans had a combined $6.2 trillion in 401(k) plans. The system allows employees to put pre-tax income into an investment vehicle—sometimes receiving a match by employers—while proportionally lowering their taxable income (along with other benefits).
The entrance of Bitcoin into the retirement ecosystem represented “a significant departure from current standard practices in more ways than one,” said Sean Smith, an investment manager based in Minneapolis who often reviews clients’ 401(k) plans. Typically, he said, 401(k) plans tend not to offer either alternative “store of value” assets, like gold, or non-U.S. currencies, like Euros—two types of asset classes commonly compared to cryptocurrencies.
The system is “all built on a foundation of trust,” Khawar said, meaning that people needed to feel that their money is in safe hands and would rise in value with time and consistent contributions.
But with Fidelity’s decision to integrate cryptocurrencies into the American retirement system, Khawar had reason to believe that foundation was weakening. Due to the billions of dollars in tax breaks the U.S. government dedicates to propping up the 401(k) retirement system, the decision could be seen as a de facto subsidy to early Bitcoin holders, who could stumble upon a new hoard of people willing to buy into the crypto casino.
At a minimum, it was a significant bet by an American institution on a highly volatile asset class that cannot be evaluated with traditional valuation metrics—one that some believe could lead to a rash of lawsuits.
Fidelity’s decision to include Bitcoin in its retirement offering had been motivated in part by a “growing interest from plan sponsors in providing access to digital assets in defined contribution plans” and “growing demand among their employees,” particularly young employees, a Fidelity spokesperson told Motherboard over email. Broadly speaking, there’s no doubting how Millennials and Generation Z have embraced crypto. One survey spearheaded by Investopedia and released in April found that as many as one-quarter of millennials are now “relying on crypto to help fund their retirement.”
But Fidelity’s decision to bet American retirement accounts on the Bitcoin market was not simply a result of consumer demand. “It’s a natural extension of their efforts over the past decade,” said Andy Boyd, Fidelity’s former head of global equity capital markets. For much of the past decade, the historically sleepy retirement giant has steadily transformed into one of the loudest institutional advocates for the crypto industry. Leading the charge has been company CEO Abigail Johnson.
Johnson wields even more significant power at Fidelity than the typical CEO. The firm was founded by her grandfather in the 1940s, and run by her father for decades until she took over as CEO in 2014. Today, nearly half of the private company is still owned by the Johnson family, offering her a degree of control that has led to her being named the second-most-powerful woman in finance. “They [the Johnson family] have absolute control. And she has been very interested in everything crypto, I would say, for 10 years,” said Boyd, who spent over 15 years at the company.
From early on in Johnson’s new role, it was clear she had become fascinated by the world of crypto. At a rare public speech during a New York blockchain conference in 2017, Johnson came out as a true “believer” in the potential of cryptocurrencies and blockchain technology, bragging that one of her computers had “mined over 200,000 satoshis,” a denomination of Bitcoin, and sporting a pin that read “Vote Nakamoto President,” a reference to Satoshi Nakamoto, the cryptocurrency’s pseudonymous creator.
“Some of you might be wondering why I’m here today. Actually, I think a lot of my colleagues at Fidelity are asking the same question,” she said then. “I love this stuff.”
Early on, Johnson reportedly held internal meetings to discuss crypto assets and blockchain technology. But soon enough, Fidelity had developed an experimental Bitcoin mining operation and developed a way for employees to pay with Bitcoin at the headquarters’ cafeteria as well. By 2017, Fidelity was allowing clients to connect their Coinbase accounts. The next year, the company created Fidelity Digital Assets, a subsidiary focused on crypto. “Our goal is to make digitally native assets, such as Bitcoin, more accessible to investors,” Johnson said then. Last year, Fidelity pushed further into the crypto world, announcing plans to increase the size of its Digital Assets staff by 70 percent and offer crypto trading beyond typical trading hours. It also applied with the SEC to launch a Bitcoin-based exchange-traded fund called the Wise Origin Bitcoin Trust, which the SEC rejected in January.
That enthusiasm is so far not shared by Fidelity’s competition in the broader 401(k) marketplace. Vanguard, one of the country’s other largest 401(k) providers, for one, has taken a wholly skeptical view of crypto, stating last September that it believed “the long-term investment case” for cryptocurrencies to be “weak,” since they simultaneously are “highly speculative” and “don’t offer any intrinsic value for the sizable amount of risk the investor takes on.” A spokesperson confirmed to Motherboard that Vanguard has “no plans to offer a cryptocurrency option within 401(k) plans.”
As a result of the industry-wide mistrust of crypto, Fidelity’s Bitcoin offering could give the firm a “competitive advantage” as more young employees ask employers to include crypto in their retirement portfolios, said Hougan. Boyd similarly said the Bitcoin offering gave Fidelity an “interesting edge” as the baby boomer generation begins to pull out its assets and Fidelity battles with the other 401(k) giants to win over the younger generation.
“There’s a lot of interest in particular with the younger generation, which they fight tooth and nail for,” said Boyd. “They want the people that are going into the prime of their working years.”
Ali Khawar, the acting assistant secretary for the Labor Department’s Employee Benefits Security Administration, started to worry about the potential inclusion of cryptocurrencies in U.S. retirement plans in the first half of last year, when the Department of Labor first heard about service providers pressuring employers to include crypto in their offerings. “They were actively and somewhat aggressively encouraging employers to adopt this within the context of the 401(k),” Khawar told Motherboard.
To better understand the idea, representatives of the Labor Department had a series of conversations both internally and with “external stakeholders,” Khawar said. He worried about the highly volatile nature of crypto, the lack of clear valuation metrics, and the ambiguous regulatory environment. But the Department wanted to know if crypto proponents had constructive answers to his questions.
“When we’ve asked the folks marketing these things how they go about valuing it or how we should think about that, the answers were pretty unsatisfying” a senior Labor Department official who requested anonymity told Motherboard. Khawar agreed. “We were not convinced, as a result of those conversations, that the kinds of issues we highlighted in the guidance weren’t problems,” he said. “They haven’t really given us an explanation of what exactly the valuation methodology is, how it actually works, [or] what any of the cryptocurrencies are intrinsically.” Some have compared it to gold, but that reasoning didn’t satisfy Khawar, as gold can be made into jewelry or any number of products.
Instead, Khawar came to view cryptocurrency as more of “a self-fulfilling prophecy” than anything else. The torrent of celebrity-led crypto endorsements, including during this year’s Super Bowl, partly inspired Khawar to start developing a counternarrative for employers to consider. The rhetoric surrounding crypto reminded him of the lead up to the mortgage crisis, he said, when people didn’t fully understand the investments they were making, only believing them to be a sure thing.
“That psychological messaging can be really powerful. It’s powerful to individuals that are thinking about how they’re gonna save for retirement. But it’s also powerful for those fiduciaries,” Khawar said.
In March, the Labor Department released its guidance, which concluded that integrating cryptocurrencies into retirement accounts presented “significant risks of fraud, theft, and loss.” Among the concerns were crypto’s volatility and lack of “academically defensible” valuation metrics; scammers’ tendency to pump and dump crypto assets with “misleading information”; and a lack of clear regulatory guidelines.
But Khawar went a step further. Adding crypto to a 401(k) offering, he said, would lend legitimacy to an industry that is thus far unwarranted. “When fiduciaries include a cryptocurrency option on a 401(k) plan menu, it signals to participants that knowledgeable investment experts have approved it as a prudent option,” Khawar wrote at the time. “This can mislead participants about the risks and cause big losses.”
One month later, Fidelity ignored the guidance and released news of its forthcoming 401(k) Bitcoin offering. Upon hearing the news, Khawar had additional concerns. Less than a year earlier, a much smaller 401(k) provider had made national headlines when it announced it would allow participants to allocate 5 percent of their retirement savings into 50 different crypto assets. Now, the country’s king of 401(k)s had allowed a 20 percent allocation into just one: Bitcoin, which has recently lost half its value from just a few months earlier.
Fidelity told Motherboard that the 20 percent cap was “designed to enhance consumer protection” in consultation with employers and emphasized that sponsors could impose lower caps should they wish to do so.
“Given this is a new investment vehicle, requiring that plan sponsors establish a cap for participants to contribute or exchange is intended to further enhance our consumer protection efforts,” a spokesperson wrote in an email.
But Khawar and other legal experts said even that percentage was too high.
“It’s a lot because it’s not just cryptocurrency. It’s one particular type of cryptocurrency,” Khawar said, adding that’s “not the kind of diversification advice that you would typically get from a financial advisor.”
Hilary Allen’s heart sank when she heard news of Fidelity’s decision, she said. Allen is a law professor who studies financial regulation at American University and recently published a paper comparing the spate of financial innovations to come out of crypto to the tools that led to the 2008 financial crisis. She had been previously heartened by the Labor Department’s guidance, which she saw as a win for investor protections. But in Fidelity’s decision, all she could see was the pain such a decision could cause.
Still, Allen said the Department of Labor’s guidance provided employees with a future “roadmap” to sue over 401(k) losses related to crypto offerings. “It really does suggest that it is a violation of fiduciary duties to be including these types of assets in a plan,” said Allen.
Under the Employee Retirement Income Security Act, often referred to as ERISA, employers are required by law to “act solely in the financial interests of plan participants,” according to the Department of Labor, a significant enough legal obligation that Khawar feels comfortable entrusting them with future decisions.
To Ted Benna, that makes sense. Benna has been referred to as the “father of the 401(k)” since the 1980s, when he figured out employers could match employees’ pre-tax retirement contributions under a new law, a revelation that led to an explosion of interest in the retirement plan.
“ERISA requires employers to act solely in the best interest of their participants, and I don’t think employers that throw this in their plan are doing that,” said Benna, an admitted crypto skeptic. “They blow that responsibility if they simply respond to some pressure from participants.”
Michael Saylor, the prominent Bitcoin devotee CEO of the enterprise analytics firm MicroStrategy, has said he hoped to become the first public company to offer Fidelity’s Bitcoin-infused 401(k) plan to employees. But most other employers so far appear to be scared off from the world of crypto. The Plan Sponsor Council of America, a nonprofit trade organization focused on retirement plans, recently performed a survey of its member organizations and found less than 2 percent were considering adding crypto to their investment options. “Plan sponsors are overwhelmingly not considering, and will not consider, cryptocurrency a prudent investment option in a retirement plan,” the nonprofit stated.
Should Fidelity’s option catch fire anyway, one of the biggest winners will likely be not the people who invest through Fidelity, but those who already own Bitcoin, said Hougan. As he explained, opening up “more of the market to potential investment for crypto has historically been good for crypto prices over the long term and therefore good for crypto investors.” Turned around, however, that same line of thinking could be viewed as more concerning.
“A lot of the profits to be made out of crypto have already been made by the people who were early adopters,” said Allen. “There may be something left for people who are getting in now. But that is only if they can find someone to get in after them.”
The traditional rationale for investment is to put money toward productive economic use, like providing jobs to people who build a product, which then produces an ongoing flow of money that benefits investors over time. By comparison, assets with “no tangible value” that are “only worth what someone else is willing to pay you” for them must by their nature constantly find more investors to sustain themselves, Allen said. As a result, Allen sees Fidelity’s decision as “really problematic.”
“They’ve opened up a pool of new investors through the 401(k) plan, which can prop up and support earlier investors,” Allen added. “But who’s gonna come in next?”
Allen’s perspective is shared by some people within the Labor Department.
“There’s reason to be concerned that the main thing motivating the purchases are that other people are buying it, and the hope that after you buy it, when it comes time to sell, you’ll be able to sell it to other people who are buying it,” a senior department official said.
Guglielmetti, the Brooklyn financial planner, described many of her clients as “crypto curious.” Considering the complicated tax implications of crypto, she can understand the desire to sidestep the tax questions by investing through a retirement vehicle like a 401(k). Should those tax benefits convince a new slew of people to enter the crypto sphere, Fidelity’s offering could come to be seen as a taxpayer-led subsidy of early Bitcoin holders, who will have found a new crop of investors to sell to.
Contributions to a 401(k) are deducted from an individual’s total taxable income, a substantial tax benefit for those who aggressively save for retirement. As of last year, the U.S. government dedicated $157 billion in so-called tax expenditures—or money the government doesn’t get because of tax breaks—to propping up employer-defined contributions like 401(k)s, more than any other area besides employer-sponsored health insurance and reduced rates on capital-gains tax, according to the Joint Committee on Taxation.
The Labor Department believes that the institutions, like Fidelity, who indirectly benefit from that subsidy should subsequently be held to a higher standard than the typical investment fund.
“The taxpayer is in a sense subsidizing the retirement marketplace, and the people playing in that marketplace in exchange for that should expect to have some additional obligations,” said the senior department official.
In the last six months, the cryptocurrency ecosystem has experienced a dramatic moment of turbulence. Bitcoin has lost half of its value. So has Ethereum, another popular cryptocurrency. Numerous others have fared worse. This isn’t even a unique situation; dramatic crashes are a familiar recurring event in cryptocurrency’s brief history.
The Fidelity spokesperson described the response from plan sponsors as “positive” and said that the company continues to believe that “digital assets will represent a large part of the financial industry’s future.”
Considering the lack of understanding surrounding crypto fluctuations, many other people appear more nervous about Bitcoin’s oncoming entrance into the retirement system. Khawar, for one, isn’t advocating against investing any money in cryptocurrency, only that which people hope will one day fund their retirement.
“This is different than just your brokerage account,” he said. “The law treats it differently. It’s just a different animal.”
Guglielmetti similarly worries a Bitcoin offering might be “incompatible with what a 401(k) is trying to do.” Hougan cautioned against all workers investing too much of their retirement in Bitcoin as well, though he also described the Fidelity news as a “win for investors” and “a step in generally the right direction.”
The prospect makes Boyd, the former Fidelity employee, nervous too. He worries that unsophisticated investors will buy into the hype and crank the Bitcoin-retirement spigot as high as they can go. “It just doesn’t seem to fit with what a 401(k) is all about,” Boyd said. “Technically, it’s an investment account, but it’s really a retirement account.”
“You’re not supposed to be daytrading in your 401(k). This is the money that is going to help you survive when you stop working so society doesn’t need to do it,” Boyd added. “Why would you put a highly volatile asset into a 401(k)? Into a retirement plan?”