Bitcoins Are All the Rage, but Not for the 401(k)

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Jasmine Ye Han

Bitcoin may be the hottest thing going in the investment world, but 401(k) plan participants aren’t likely to see it on their regular investment menus anytime soon.

For the vast majority of 401(k) plans, advisers interviewed by Bloomberg BNA predict, this “cryptocurrency” won’t be an investment option. It’s too volatile and there’s no fund that trades on government-sanctioned exchanges, they say, which creates a big hassle factor for plan sponsors as well as participants.

One bitcoin investment, the Bitcoin Investment Trust (GBTC), an over-the-counter fund that tracks bitcoin, has made it to the list of options available for the self-directed brokerage window of Vanguard 401(k) plans.

But for the foreseeable future, bitcoin offerings in 401(k) plans will be the exception, not the rule.

Bitcoin is a digital currency that relies on blockchain, a public digital ledger system. The system was designed in 2008, following the U.S. financial crisis. The idea was to use cryptography to control the creation and transfer of money, rather than relying on central authorities, according to bitcoinwiki, an open source site for the Bitcoin community.

The first real-world transaction with bitcoin happened in 2010, when 10,000 BTC were traded for two pizzas valued at $25.

That was a long time ago in bitcoin years. At the end of 2016, one bitcoin was worth about $1,000. By Sept. 1, 2017, its price had increased almost fivefold to over $4,900 per BTC, according to Bloomberg Terminal’s virtual currency monitor. But the price dropped below $3,300 at one point on Sept. 14, after a large Chinese exchange said it would halt trading amid a government crackdown on cryptocurrencies, according to a Bloomberg report.

Too Risky for Regular Investment Menu

Something “new and exciting” tends to pique the interest of 401(k) plan participants, but bitcoin might not be appropriate for a plan looking at long-term investing, given its volatility, Ken Verzella, vice president of product development at MassMutual Workplace Solutions, told Bloomberg BNA.

“If you want to do this outside your retirement plans, then by all means. But we’re going to have some guard rail in place, not to allow them to invest in something they might not fully understand,” Verzella said of participants.

And there are risks for the plan fiduciaries, said Keith Clark, the Managing Partner of DWC – The 401k Experts, a consulting and third-party administrator firm. Bitcoin investments in a 401(k) plan could be a target for attorneys, Clark said. Clark is also an adjunct professor at Carlson School of Management, at the University of Minnesota.

“Especially with the fiduciary rule, we’re going to see more litigation. There’s going to be plenty of law firms targeting participants,” he said. “And having bitcoin in those plans may raise flags for those attorneys.”

What’s definitely not helping the situation: The Department of Labor hasn’t issued any guidance for plan fiduciaries regarding investing in cryptocurrencies.

A Labor Department spokesman told Bloomberg BNA the department doesn’t plan to issue any guidance at this time, though its Employee Benefits Security Administration will “keep an eye out” during its usual compliance and enforcement efforts.

Aaron Pottichen, president of retirement services for CLS Partners, an employee benefits consulting firm, and Verzella said the popularity of bitcoin reminds them of the rush to invest in real estate before 2008. But it changes nothing for 401(k) plans, Pottichen said.

“If we succumb to every new theme that happens in the investment world, we would be changing our advising guidance every three months,” Pottichen said.

Self-Brokerage Window

Clark also compares bitcoin to real estate, because of its asset class. IRS issued guidance in 2014 that virtual currency like Bitcoin is treated as property--the same as real estate.

“From a 401(k) plan perspective, you would want a qualifying plan asset, and property is not,” Clark said. To hold such property, investors have to find the trust that can take custody. Self-directed brokerage accounts in 401(k) plans could be a possible route, if the custodian for the self-directed portion can take custody of cryptocurrencies.

Kingdom Trust Co., one such trust, had its first brokerage account client use his 401(k) funds to buy cryptocurrencies in mid-September, Charles “Bo” Ives with Kingdom Trust told Bloomberg BNA. The client belonged to a small plan, Ives said.

Although a self-directed brokerage window usually allows more liberty in risks, Clark and Ives agree that big employers are very unlikely to offer bitcoin even in the self-directed portion, for fear of the operational burden, whether in record-keeping, reporting, or communicating to participants.

Small plans, before allowing bitcoin in the plan, need to be aware of the independent audit requirement, Clark said. ERISA requires that if a small plan has more than 5 percent of assets that are non-qualifying assets, it has to either have an independent audit, or purchase a bond. Either choice adds costs to plan sponsors, but if they don’t meet the requirement, they might get caught, Clark said.

What About Funds That Track Bitcoin?

Plan sponsors that offer brokerage windows often restrict purchases to securities in key exchanges, Clark said, but there hasn’t been a bitcoin exchange-traded fund that got approval from the Securities and Exchange Commission to trade on formal exchanges.

VanEck, a New-York based money manager, filed to launch a bitcoin exchange-traded fund with the SEC in early August. The SEC has rejected at least two other bitcoin ETF requests in 2017. GBTC, the Bitcoin fund offered in the self-directed portion by Vanguard, is traded on OTCQX, an over-the-counter market allowing stocks that aren’t listed with the SEC.

“If there’s an ETF that gets approved, well there you go. If mutual funds start purchasing it, there’s another way to get at it,” Clark said. “At this time, based on lack of government oversight or the ability to trade on a government sanctioned exchange or an ETF for bitcoin, plan fiduciaries that consider bitcoin should come to the conclusion that the answer is ‘No.’”

Roundabout: 401(k) Rollover to Self-Directed IRAs

Under a few circumstances, plan participants can roll over their 401(k) funds to self-directed IRAs that allow investment in bitcoins: if the participant is retired or 59 ½ years old, when he or she changes jobs, or if the plan has the in-service withdrawal feature, which usually has a cap for the amount rolled over, Pottichen said.

Such self-directed IRAs are available in two types: checkbook IRAs and custodial IRAs. Checkbook IRAs through companies such as Broad Financial and Entrust Group require that the IRA owns a legal entity, such as an LLC, and the account holder operates in the name of the entity. But once the money is in the LLC’s bank account, the clients can use the account to make transactions themselves, Jeff Astor with Broad Financial said.

Custodial IRAs through BitcoinIRA and First Digital IRA don’t require a legal entity, but clients need to give instructions to the custodian and have the transaction settled for them.

Firms are experimenting with cryptocurrencies in other aspects of their services as well. Fidelity has incorporated CoinBase, a cryptocurrency exchange and digital wallet, into its website. It allows its brokerage account clients to view their CoinBase balance in portfolio summary as part of their financial picture.

To contact the reporter on this story: Jasmine Ye Han in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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