Retirement plan members should exercise caution before adding crypto to their 401(k) plan’s investment options, the US Department of Labor warned Friday.
The warning comes a day after US President Joe Biden signed an executive order establishing a government-wide effort to develop policies for bitcoin and other related assets.
Cryptocurrencies such as bitcoin and other cryptoassets like NFTs present 401(k) investors with “substantial risks and problems.” According to the DOL, the dangers include theft, financial loss, and fraud.
Crypto Poses Risks To 401(k)
Ali Khawar, the Employee Benefits Security Administration’s acting assistant secretary, stated:
“At this early point in the cryptocurrency’s existence… the DOL has serious concerns about plans’ decisions to expose members to direct investments in cryptocurrencies or related products.”
A 401(k) plan is a tax-advantaged retirement savings option offered by many American employers. It is termed after a provision of the US Internal Revenue Code.
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When an employee enrolls in a 401(k), he or she agrees to have a portion of each paycheck immediately deposited into an investing account.
Employers may match a portion or the entire amount of that contribution. The employee has a variety of investment options, most commonly mutual funds.
Employers’ ‘Fiduciary Duty’
Employers who offer a 401(k) plan has a fiduciary duty to their employees about the investments they offer. This legal obligation requires them to make responsible investment decisions and to monitor them on an ongoing basis.
This obligation has been at the center of a spate of 401(k) lawsuits brought over the last decade, alleging that workers lost money as a result of exorbitant charges and losses from poor fund selection.
Crypto total market cap at $1.71 trillion on the daily chart | Source: TradingView.com
Protecting Plan Members
As a result, the EBSA intends to take appropriate action “to safeguard the interests of plan participants and beneficiaries regarding these assets,” according to the DOL statement.
These activities would include inquiring about the ability of plan sponsors that provide crypto investments to manage the risks indicated.
According to Investopedia, there are two fundamental types of 401(k)s: traditional and Roth. They differ principally in terms of how they are taxed.
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Employee contributions to a standard 401(k) are “pre-tax,” meaning they lower taxable income, but withdrawals are taxed.
Roth 401(k) contributions are made using after-tax income; there is no tax deduction in the year of contribution, but withdrawals are tax-free.
The DOL is concerned that if bitcoin is included on a 401(k) plan’s menu, plan participants may view it as a secure investment rather than one that carries dangers.
Featured image from CNBC, chart from TradingView.com