Cryptocurrency is starting to pop up as an alternative asset class in some 401(k) plans. Retirement savers may be wondering if it's wise to invest.
"Making it this easy and accessible has both pros and cons [for investors]," said Douglas Boneparth, a certified financial planner and founder of Bone Fide Wealth in New York.
Fidelity Investments and ForUsAll, which administer workplace retirement plans, began offering cryptocurrency such as bitcoin to 401(k) investors within the past few months. They appear to be the first companies to do so.
However, that doesn't mean all 401(k) plans will offer crypto.
Employers must use an administrator that grants access and then opt to make crypto available to workers. Some may hesitate after a U.S. Department of Labor warning this year to exercise "extreme care" before adding crypto alongside more traditional stocks and bonds funds.
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The regulator identified speculation and volatility, as well as the challenge for 401(k) investors to "make informed investment decisions," among its primary concerns.
"As volatile as it is, it has the potential for huge upswings," said Ivory Johnson, a CFP and founder of Delancey Wealth Management in Washington, referring to cryptocurrency.
Bitcoin, for example, peaked a year ago at nearly $69,000, more than doubling from the start of 2021. Its current price, at around $21,000, is down 70% since then; the crypto market overall has lost $2 trillion in value from its peak.
Despite that pullback, bitcoin prices have still nearly tripled since the beginning of 2020.
Crypto's upside could benefit buy-and-hold investors, especially at a time when many Americans are behind on retirement savings, said Johnson, a member of CNBC's Advisor Council. The con: Most people make knee-jerk reactions and sell in the short term, he added.
Unlike holding crypto in a taxable investment account, crypto returns don't incur capital-gains tax if and when investors sell their 401(k) crypto holdings, Johnson said.
But crypto's upside carries greater risk, too.
"You might be wrong," Johnson added of a speculative bet in crypto. "People make decisions based on Twitter, they hear something that's compelling ... and they go all in and put 30% of their retirement money in bitcoin.
"You've [potentially] made a bad situation exponentially worse," he said.
How to pick a crypto allocation
Financial advisors recommend investors allocate only a small piece of their portfolio — generally no more than 5% — to crypto.
Investors with savings outside their 401(k) plan should consider their crypto allocation as part of their overall investable net worth, said Boneparth, also a member of CNBC's Advisor Council.
For example, someone with $50,000 in a 401(k) plan and $100,000 in a separate taxable brokerage account would generally allocate up to 5% of that $150,000 total to cryptocurrency, he said.
A young investor in their 20s may be well-suited for a 5% allocation while someone in their 50s who's nearer to retirement age should likely scale back that exposure, Johnson said.
The investment rules don't just go away just because there's a digital asset to invest in your account.Douglas Boneparthfounder of Bone Fide Wealth
Investors may need to rebalance their allocations over time as crypto outpaces or lags returns elsewhere in their portfolios.
"The investment rules don't just go away just because there's a digital asset to invest in your account," Boneparth said. "Risk and reward, that relationship never goes away."
Fidelity and ForUsAll have put some safeguards in place to try limiting exposure.
For example, Fidelity disallows investors from putting more than 20% of their 401(k) savings into its Digital Asset Account, though employers can choose to reduce that cap. The account holds bitcoin and short-term, cash-like investments to help facilitate daily transactions.
ForUsAll limits allocations to 5%. It offers six cryptocurrencies — bitcoin, ethereum, solana, polkadot, cardano and USDC — and soon intends to add more. Within the 50 or so retirement plans that have made crypto available, 12.5% of investors are investing and allocate 4% of their portfolio to crypto, on average.
"To be at 0% [of your portfolio], you're likely going to be 100% wrong," said Ric Edelman, founder of the Digital Assets Council of Financial Professionals, in September at the Future Proof wealth festival in Huntington Beach, Calif.
He also advised investors against putting a significant chunk of their portfolio in cryptocurrency.
Stick with bitcoin, ethereum for now, advisors said
Investors shouldn't jump blindly into crypto just because it's available, financial advisors said. As with other investments, they should generally understand what they're buying.
The Labor Department cautioned that employers may be sending the opposite message to investors by adding crypto alongside traditional funds.
When employers offer crypto in a 401(k), "they effectively tell the plan's participants that knowledgeable investment experts have approved the cryptocurrency option as a prudent option for plan participants," the agency wrote. "This can easily lead plan participants astray and cause losses."
Investors who opt to save some retirement money in cryptocurrency are likely also best-suited by sticking with bitcoin and ethereum, at least for now, advisors said. These are the largest cryptocurrencies and it's "exponentially more difficult" to speculate with anything else, Boneparth said.
"I think you'll see, more and more, bitcoin becoming a risk-on asset like stocks," he said.
"We're seeing it mature," he added. "There are many question marks that remain."