Fidelity Investments, one of the country’s largest 401(k) plan providers, announced on April 26, 2022, that it will allow its clients to offer bitcoin as an investment option in their retirement plans.1 In connection with this news, MicroStrategy Incorporated (NASDAQ: MSTR), a publicly traded cloud service and business intelligence company and a major player in the bitcoin field, announced that it will allow its employees to invest in bitcoin through the company’s 401(k) plan.2
Fidelity’s announcement marks a significant milestone in bitcoin’s recent evolution as a distinct asset class, as retail investors continue to pour into the world’s largest digital
asset network. Bitcoin has experienced unprecedented growth in its market price over the past several years, significantly outperforming every other asset class and making it impossible for retail and institutional investors to ignore.
Nevertheless, Fidelity’s move to offer bitcoin as an investment option under its plans comes on the heels of recent guidance from the Department of Labor,3 in which the Department cautioned plan sponsors of the risks of permitting plan participants to invest in cryptocurrencies (including bitcoin) and reminded them of their responsibilities as plan fiduciaries, which includes deciding whether to include a particular investment option in their 401(k) plan. The Department warned that it "expects to conduct an investigative program aimed at plans
that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments."4 In addition, after Fidelity announced its plans for offering a bitcoin investment option, Ali Khawar, acting assistant secretary of the Department’s Employee Benefits Security Administration, noted that the Department has "grave concerns" with Fidelity’s proposal.5 However, according to an article in The Wall Street Journal, Khawar acknowledged that the Department is not banning cryptocurrencies (including bitcoin) and "if employers think they can make a case for the asset and have addressed the agency’s concerns, ‘that is their decision.'"6
Given the current media frenzy surrounding bitcoin (and other digital assets) and the uncertainties in the traditional markets, many plan sponsors may be intrigued by the possibility of adding bitcoin to the list of investment options in their 401(k) plans. Nevertheless, given the Department’s focus on this issue and other uncertainties surrounding bitcoin as a retirement plan investment, plan sponsors and their investment advisers should make informed and prudent decisions when evaluating bitcoin as an option.
To assist plan sponsors who are considering making bitcoin available as an investment option, Calfee’s Employee Benefits and Executive Compensation Group intends to provide updates discussing bitcoin as an asset class and the potential risks and benefits associated with including bitcoin as an investment option under their 401(k) plan.
Specifically, we intend to address:
- What is bitcoin and how do its characteristics create a distinct new asset class?
- What are the Department’s concerns regarding bitcoin (or other cryptocurrencies) as an investment option under a 401(k) plan?
- What legal and fiduciary responsibilities do plan sponsors have when adding an investment option to their 401(k) plan?
- What unique considerations must plan sponsors consider when evaluating bitcoin as an investment option?
- How should plan sponsors work with their investment advisers and outside vendors when adding bitcoin as an investment option?
- How do other cryptocurrencies and digital assets compare to bitcoin as an investment option?
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We encourage any plan sponsor who is considering bitcoin as an investment option in its 401(k) plan to reach out to a member of Calfee’s Employee Benefits and Executive Compensation Group to discuss the legal ramifications, as well as the practical issues, associated with adding bitcoin.