Nearly 50% of Gen Z and millennials want crypto investments in their 401(k)s—here's why it's a risky move

If you're dreaming of combining your cryptocurrency investments with your retirement savings, you're not alone.

Nearly 50% of Gen Z and millennial employees wish they could invest in cryptocurrency via their 401(k) retirement plan, according to Charles Schwab's "2022 401(k) Plan Participant Study," which surveyed 1,000 401(k) plan participants between the ages of 21 and 70 who work for companies with at least 25 employees and currently contribute to their company's 401(k) plan.

"They are questioning traditional approaches to both work and retirement," Catherine Golladay, head of Schwab workplace financial services, said in a press release. "The 401(k), while still their primary retirement savings tool, is no longer viewed as their only path to retirement."

For some investors, it's already possible to invest in cryptocurrency via a 401(k).

Fidelity Investments, which manages the employee retirement benefits programs for nearly 23,000 businesses, has given companies the ability to offer employees the option to invest in bitcoin through dedicated "digital assets accounts." If an employer offers this option, employees can invest up to 20% of their 401(k)s in bitcoin.

However, just because the option is available doesn't mean it's a good fit for your retirement strategy.

"There's no underlying fundamental value to cryptocurrency," says Greg McBride, chief financial analyst at Bankrate. "It's neither time tested nor proven as a sustainable wealth creator."

Adding cryptocurrency to your retirement portfolio may drag down its overall performance, McBride adds.

That's because, typically, you would diversify your portfolio by spreading your investment dollars across multiple financial assets, such as stocks and bonds. This helps to reduce the volatility of your portfolio since you're not overly invested in one specific type of asset.

But cryptocurrency is a highly volatile asset, subject to erratic fluctuations and falls in value, which means it could increase your portfolio's volatility rather than reducing it.

Given the unpredictable nature of the crypto market, the U.S. Department of Labor has warned companies that manage 401(k) plans to "exercise extreme care before including direct investment options in cryptocurrency."

In addition to crypto, younger generations are interested in investing in a wide array of options via their 401(k)s, including annuities, which offer guaranteed income in retirement, according to Schwab's survey. However, it's important to note that annuities can come with a number of downsides for investors, such as costly fees and restricted access to your money.

"They recognize the value in speculative assets but also recognize the value of guaranteed income as they approach retirement," says Nathan Voris, director of investments, insights and consultant services at Schwab retirement plan services.

Sign up now: Get smarter about your money and career with our weekly newsletter

Don't miss: From Whole Foods to Gamestop, here are 5 retailers that accept crypto—but there’s a catch