Letter from US: Crypto currencies gain a toe-hold in America’s 401(k) retirement plans

“At this moment, we have not seen 401(k) plans offer options to invest in any currencies, including digital ones, because plan sponsors typically focus on plan options that are diversified and long-term-oriented rather than more speculative,” says Greg Ungerman, the head of investment consultancy Callan’s defined contribution practice. 

“Callan doesn’t see any appetite to get involved in cryptocurrencies among its clients other than what a participant might invest in within the brokerage window.”

A brokerage window is a brokerage account within a workplace retirement plan, including 401(k) and other types of retirement plan, that participants can use to invest in securities that are not part of their retirement plan’s core investment offerings. 

The brokerage window – also known as a self-directed option or account – typically enables an individual participant to choose from thousands of investments, including mutual funds, exchange-traded funds (ETFs) and individual stocks. 

The concept is relatively new but is quickly gaining popularity as more companies give the option to employees to allow more flexibility in investing.

Shawn O’Brien, senior analyst at research consultancy Cerulli Associates, agrees record keepers and 401(k) plans, for the most part, do not offer access to cryptocurrencies. 

“ERISA plan fiduciaries are very careful about what they choose to include in their core line-ups and I can’t imagine many will see the use case for DC plan participants who are by and large, long-term, buy-and-hold investors.” 

However, Matt Apkarian, senior product development analyst at Cerulli, says that, according to the firm’s latest survey, 20% of asset managers consider developing ‘crypto products’ as a priority. 

There are 10-15 applications currently with the SEC for ETFs linked to or based on cryptocurrencies that, pending approval, some industry experts think may be launched by mid-2022. 

“Investors may be able to buy these products via a brokerage window of their 401(k) plans, depending on plan-specific rules, or through IRAs [Individual Retirement Acc-ounts],” says Apkarian. Alternatively, a registered investment adviser (RIA) that uses a digital platform like Flourish Crypto can directly buy cryptocurrency on behalf of clients. 

Flourish Crypto was launched last September by Flourish, a fintech start-up owned by insurance giant MassMutual.

Almost 10% of 401(k)s offer self-directed brokerage accounts, and assets in these accounts amount to $115bn or 1.8% of all 401(k) assets, according to Cerulli.

At Schwab, numbers are higher – approximately 60% of its Retirement Plan Services 401(k) plan clients offer a self-directed brokerage account to their employees; overall indirect crypto-currency investments make up less than 1% of those brokerage window investment balances. 

Grayscale Bitcoin Trusts, Grayscale Ethereum Trusts and Grayscale Litecoin Trust are examples of products that offer indirect exposure to cryptocurrencies and that employees can buy and hold in a brokerage window.

Cryptocurrency “has become large enough and consumer awareness is high enough that you can’t ignore it”, Charles Schwab CEO Walt Bettinger told the Securities Industry and Financial Markets Association’s annual conference in November. 

He predicted there will be “more and more ways to invest in crypto – maybe ways that are a bit safer than direct purchases”. However, one of his concerns is that it is still not clear exactly how the US government intends to regulate crypto.

At Fidelity, about 4,600 401(k) plans – around 21% of its platform – currently offer a self-directed brokerage option. “Investment line-ups made available to participants, including offering access to a self-directed brokerage window, are determined by the plan sponsor,” emphasises Dave Gray, head of workplace retirement products and platforms, at Fidelity Investments. 

Fidelity customers with Coinbase accounts can also connect their Coinbase account to their Fidelity portfolio view – but this is to view balances rather than make transactions.

“We have seen a relatively small but growing interest from plan sponsors in providing their employees digital-asset products in defined contribution and defined benefit plans,” adds Gray.  

One problem with the growing popularity of brokerage windows is the potential increase in costs for 401(k) members. Participants are responsible for all trading costs, adviser fees, or commissions generated using a self-directed plan and total expenses may be high.

“We have seen a relatively small but growing interest from plan spon­sors in providing their employees digital-asset products” - Dave Gray

“All things considered, our advice to asset managers is to evaluate the crypto landscape and to consider developing capabilities whether for offering products or for educating the advisers and the public,” says Daniil Shapiro, associate director at Cerulli.