On August 7, U.S. President Donald Trump signed an executive order allowing investments in cryptocurrencies within 401(k) retirement plans. The crypto industry claims this move is beneficial for adoption, but investment professionals warn of significant risks.
The order, titled "Democratizing Access to Alternative Assets for 401(k) Investors," directs U.S. financial regulators to expand investment access to cryptocurrencies and private companies within 401(k) plans.
401(k) employer-sponsored investment plans are among the most popular retirement plans in the U.S. As of 2024, 401(k) plans hold assets totaling $8.9 trillion. Therefore, this could represent a massive source of demand for cryptocurrencies, potentially driving prices up.
Crypto traders may view this move as a bullish signal for further price increases, but financial professionals and market observers indicate there are significant risks involved.
Trump's order opens investment channels that were previously closed off to the most popular retirement plans in the U.S., directing the Department of Labor to reassess restrictions on six different asset classes:
- Private equity
- Real estate (including debt instruments secured by real estate)
- Actively managed crypto investment products
- Commodities
- Infrastructure development financing projects
- Longevity risk-sharing pools
Industry observers claim that more capital flowing into the crypto market will drive up crypto prices. André Dragosch, Head of European Research at crypto asset management firm Bitwise, told Cointelegraph on the "Chain Reaction" show on X platform that this could push Bitcoin prices above $200,000 by the end of the year.
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CJ Burnett, Chief Revenue Officer at Compass Mining, told Cointelegraph, "The increase in Bitcoin adoption within 401(k) releases a large pool of capital and passive investment flows, stabilizing assets and reducing volatility."
A 401(k) is a U.S. employer-sponsored retirement savings plan that allows employees to contribute a portion of their income, often with partial matching from employers, and invest in various funds. 401(k) plans typically enjoy tax deferral or tax benefits.
While 401(k) plans may be favorable for cryptocurrencies, financial professionals are less certain that cryptocurrencies are beneficial for 401(k) plans.
One concern for observers is the high fees associated with these alternative investments. According to data from the Investment Company Institute (ICI), the average fee for most 401(k) plan assets is only 0.26%, while private equity typically adopts a "2 and 20" structure, meaning managers charge a 2% total fee and 20% of profits.
Philitsa Hanson, Head of Product, Equity, and Fund Management at Allvue Systems, stated, "I think there isn't enough discussion about the potential impact of higher fees."
Hanson continued, saying that this executive order "raises more questions than answers." "Someone needs to think very carefully about how to incorporate these types of assets."
The fees for Bitcoin (BTC) exchange-traded funds (ETFs) are generally comparable to the ICI average, although some major outliers, such as the ProShares Bitcoin Strategy ETF, Valkyrie Bitcoin and Ether Strategy ETF, and Grayscale Bitcoin Trust ETF, have fees of 0.95%, 1.24%, and 1.50%, respectively. The fees also do not include other aspects that affect profitability, such as liquidity and trading costs.
Ary Rosenbaum of Rosenbaum Law Firm wrote that Bitcoin's volatility is too high to be included in a 401(k): "When Bitcoin drops 40% in a week — which can happen — plaintiff lawyers will come knocking. 'Why are you offering such a high-risk asset?' 'What due diligence did you perform?' 'Where is the risk disclosure?'"
He referred to cryptocurrencies as a "trust minefield." It includes complex mechanisms like staking, forks, and airdrops, with complicated tax implications. "Suddenly, you've created a participant education nightmare."
Margaret Rosenfeld, Chief Legal Officer at staking service provider Everstake, told Cointelegraph, "The biggest risks are the familiar risks of any investment: market volatility, cybersecurity, and trust exposure."
Rosenfeld stated that updating 401(k) related regulations and guidance could mitigate many associated risks. First, she suggested creating clear standards for what could be considered "prudent" digital assets.
She noted that the Employee Retirement Income Security Act of 1974, which regulates retirement plans, "was built for stocks and bonds, not for blockchain."
Rosenfeld recommended upgrading the "pipeline of the retirement system," stating, "The record-keeping systems supporting 401(k)s are not designed for forks, airdrops, or real-time volatility. We need a digital asset-ready platform that can automatically track every on-chain event."
She also stated that regulators should define benchmarks for liquidity, transparent pricing, custody, and cybersecurity to ensure certain digital assets are "retirement-ready," including independent risk ratings.
Rosenfeld said, "If managed properly, cryptocurrencies in 401(k)s can diversify retirement portfolios and bring greater transparency to this often institutionally unmonitored space."
However, much depends on whether cryptocurrencies are managed appropriately. Rosenbaum wrote that cryptocurrencies could be a valuable addition to retirement portfolios as they offer diversification, inflation hedging, and opportunities to "engage with financial innovation." However, they do not belong in a 401(k).
"Use a brokerage account. Use a self-directed Roth IRA. Use your disposable income. But do not use this plan, which is intended to be someone's financial lifeline for retirement," he said.
Rosenbaum wrote that, for now, cryptocurrencies are not a viable asset for 401(k)s. "It's a shiny object, and chasing it will expose participants — and sponsors — to unnecessary risks. A conservative 1%-5% allocation does not address the fundamental issues: volatility and complexity are incompatible with retirement plans."
The Trump administration's relaxation of 401(k) requirements echoes a pattern in recent legislation where user protection and systemic risk give way to promoting crypto adoption and the digital asset industry. The integration of cryptocurrencies with the traditional financial system has yet to be stress-tested, and the outcomes are unpredictable.
Related: Wall Street Journal: After the Biden administration "weaponized" banks, the Trump family turns to support cryptocurrencies
This article does not contain investment advice or recommendations. Every investment and trade involves risks, and readers should conduct their own research when making decisions.
Original article: “Observers: Bitcoin (BTC) Inclusion in 401(k) Plans Excites Crypto Investors, but Serious Risks Exist”
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