As Fidelity adds Bitcoin to 401(k) plans, consider this before investing in cryptocurrency

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Fidelity Investments announced that it will begin to offer Bitcoin as an investment option in its 401(k) plans. Fidelity, the largest 401(k) provider in the country, is the first to offer this as an option. I have no doubt in the very near future, more 401(k) providers will allow Bitcoin and other cryptocurrencies as an investment option. Thus, participants in 401(K) plans will have to decide if cryptocurrencies are for them.

Under the Fidelity plan, a 401(k) participant can invest money into a digital asset account which will then invest in Bitcoin. However, soon Fidelity will expand its offering to include other cryptocurrencies. Even though your employer has a Fidelity 401(k) plan, that does not necessarily mean you will be able to invest into a digital asset account.

According to the Fidelity plan, the employer must approve this option. In addition, Fidelity will limit how much investors can contribute. Currently, the limit is set at 20 percent; however, employers can choose to set the limit lower.

As an employer, the question is, should you offer Bitcoin as an investment alternative for employees. It is important to remember that employers have a fiduciary obligation when it comes to 401(k) plans. As part of that fiduciary obligation, responsible employers must offer investment options that are prudent and allow employees to diversify their accounts.

Employers also have a responsibility with regard to fees charged to employees in a 401(k) plan. Under the Fidelity plan, employees with digital asset accounts will be charged an annual fee of 75 to 90 basis points. Meaning, if you invested $10,000 in a digital asset account, your annual fee would be between $75 and $90. The Fidelity plan will also have associated trading fees which have not been announced yet. Therefore, before an employer automatically adds in the digital asset account option, they need to ensure that the fees are reasonable, and they meet their fiduciary obligations with regard to fund selection.

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If you’re an employee and your employer offers Bitcoin or other cryptocurrencies as an investment option, the question is, should you invest in it. For the great majority of people, I think it is an investment that you should avoid. Cryptocurrencies are very complicated to understand, and I believe you shouldn’t invest in anything you don’t understand. Successful investors understand the risks involved and how the investment works. I venture to say that the great majority of people, including myself, don’t fully understand Bitcoins and thus, we should avoid them.

On the other hand, if you understand cryptocurrencies and the risks involved, you may wish to invest a portion of your portfolio in Bitcoins. I believe investing 20 percent of your portfolio is too much. If I were to invest in bitcoins, I would limit it to no more than 5 percent of my portfolio.

Some investors will buy Bitcoin simply because they fear missing out on a potentially good investment. I have no idea what the future of Bitcoin will be; after all, there are lots of risks involved, including the risk that governments will begin to regulate Bitcoin. Government regulations can have a serious impact on the viability of Bitcoin in the future. My philosophy has always been that investors who understand their investments and invest based upon their goals and objectives, rather than fear or greed, will be the most successful. Therefore, don’t think you have to invest in Bitcoins to be successful, because you don’t have to.

If you are going to invest in Bitcoin, my advice is to spend time researching and understanding what you’re getting involved in. Don’t be afraid to admit that you don’t understand it. I know lots of financial professionals who have spent time trying to understand Bitcoin and other cryptocurrencies and are still somewhat clueless. I have learned throughout my career that some of the best investments I’ve ever made are the ones I’ve walked away from. At this point I’m choosing to walk away from cryptocurrencies. Maybe in the future I’ll consider them, but for now, I’ll take a pass.

Good luck.

Rick Bloom is a fee-only financial advisor. His website is www.bloomadvisors.com. If you would like him to respond, email rick@bloomadvisors.com.