Bitcoin Is Coming to 401(K) Plans. But Not Your Target-Date Fund

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  • Fidelity Investments is letting employers offer a bitcoin investment to 401(k) savers. It would sit alongside the usual one to two dozen funds available to workers.
  • However, target-date fund managers aren't yet allocating to crypto as a share of funds' overall holdings. They cite risks like volatility and a hazy regulatory outlook.
  • TDFs are the most popular 401(k) investment. They captured over half of all contributions in 2020.

Crypto may be coming to your 401(k) plan. But the same isn't true of target-date funds — at least not yet.

Target-date funds are the most popular investments in workplace retirement plans. They hold a mix of stocks, bonds and other securities, growing more conservative over time as investors approach retirement.

But cryptocurrencies like bitcoin don't appear to factor among those holdings — and likely won't for at least three to five years, according to investment and retirement experts.

The 10 largest target-date managers by assets confirmed to CNBC that they don't allocate money to crypto in their TDFs.

Fidelity Investments is among them. That's notable because the firm announced in April that it would be the first 401(k) administrator to let employers offer a bitcoin investment, which would sit alongside the one or two dozen others employers generally make available to workers.

But the firm, the second-largest target-date fund manager, doesn't have plans to add a crypto allocation to its TDFs, according to spokeswoman Claire Putzeys.

The firm managed about $460 billion in target-date assets at the end of 2021, according to Morningstar. Putzeys declined additional comment for this story.

"It's something to watch but a ways out," David Ireland, a senior managing director at State Street Global Advisors, which manages about $150 billion in target-date assets, said of crypto in its TDFs.

"It's certainly not a hard no," added Ireland, who heads the firm's global defined contribution team. (A 401(k) is a type of defined-contribution plan.) "But there's a lot more, I think, to understand here."

Crypto risks

Bitcoin offices in Istanbul, Turkey, on May 11, 2022.
Umit Turhan Coskun/NurPhoto via Getty Images
Bitcoin offices in Istanbul, Turkey, on May 11, 2022.

Target-date funds captured 59% of all 401(k) contributions in 2020, according to Cerulli Associates. The funds harbor about a fourth of all 401(k) savings, the largest share relative to others, according to the Plan Sponsor Council of America.

Money managers and investment experts cite risk as a primary hurdle for crypto addition.

A plan administrator like Fidelity seems to carry little risk for simply making a 401(k) investment available. Employers bear the bulk of the risk — they're the gatekeepers that choose whether to grant access to workers.

But the calculus is different for a money manager: Allocating to crypto within a target-date fund (even if just a small share, like 2% to 5% of total assets) could cause employers to swiftly reconsider the fund and swap out for another, according to Bob Jenkins, head of research at Refinitiv Lipper.

It goes back to risk: Employers have been sued by current and former employees at elevated rates in recent years over their 401(k) investments.

Some claim the employers chose funds that were too costly or underperformed, for example, in breach of their fiduciary obligations.

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A money manager could see its TDF assets "crater" as a result, said Jenkins, a former portfolio manager for Fidelity's target-date funds.

"I see zero upside if I'm a TDF manager to adding crypto," he said.

A money manager's choice could open it up to investor lawsuits, too, experts said.

"Now you're the one making the decision, you're the one who has to face the firing squad if the market goes the wrong way," according to Chris Brown, founder of Sway Research, which analyzes investment distribution in 401(k) plans.

Regulation and volatility

The Department of Labor recently expressed reservations about crypto as an investment in 401(k) plans, citing "significant risks" to investors like speculation and volatility.

Bitcoin prices edged below $30,000 on Wednesday for the second time this week, though recovered some ground. Prices, almost $40,000 a week ago, are now less than half their peak value (over $67,000) in November.

"The mandates we manage for clients today are not well suited for investing directly in digital assets, and we are cognizant of the high level of speculation and lack of regulatory clarity in this space," according to Bill Weeks, a spokesman for T. Rowe Price. "Our research will continue. Our target date strategies do not invest in crypto and have no near-term plans to do so."

However, Weeks added, "Given the size of digital asset markets, their impact on capital markets cannot be ignored."

T. Rowe is the No. 3 target-date manager by assets. The firm oversaw almost $400 billion in its TDFs at the end of 2021, according to Morningstar data.

"We don't currently have plans to introduce an allocation to cryptocurrency in the American Funds Target Date Retirement Series," according to a spokeswoman for Capital Group, which manages the American Funds brand. "We believe that long-term oriented retirement investors are well-served with a diversified portfolio of equities and bonds, which are liquid and transparent markets."

While crypto volatility and a hazy policy and regulatory outlook appear to be roadblocks, the asset class has created some long-term value, Ireland of State Street said. Despite the recent plunge, bitcoin prices are still up roughly fourfold from the beginning of 2020.

Philosophically, using TDFs to provide a more controlled exposure to certain asset classes (like crypto) may be beneficial for investors, Ireland said.

It'd be akin to something like commodities, an asset class to which State Street allocates in its TDFs but which likely doesn't make sense as a stand-alone 401(k) investment that can theoretically capture all of an investor's savings, he said.

"You have to have a really strong conviction it will have a meaningful improvement on your risk-adjusted returns," Ireland said. "I think that case still needs to be made."

"We're not going to be the outlier," he added.

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