Adding Cryptocurrency to your 401(k) Plan: Risks and Best Practices

Cryptocurrency in Today’s Investment World


Cryptocurrencies still garner a lot of attention in the investment world, and despite remaining high-risk they are amongst the asset options for retirement plan diversification. They may significantly increase expected returns without changing expected risk. For many people it might be a pretty good solution to alternate one’s 401(k) investment portfolio. But is crypto a wise bet in your 401(k) portfolio?

According to one recent Fidelity survey, one third of the global institutional investors’ world is already investing in digital assets already and more than 60% believe that there’s a place for digital currencies in today’s portfolios. MassMutual made a $100 million bitcoin deal for their general investment account in December 2020. This and many other examples represent a shift in attitudes towards cryptocurrencies.


Risks Related to Adding Crypto into 401(k) Plans


It is, then, hardly surprising, that most advisors are now queried about adding crypto to their clients retirement portfolios. Investors should keep in mind that a small amount of crypto may be a good diversifier rather than an opportunity to significantly increase one’s savings by investing everything in one asset. Although bitcoin and altcoins have shown significant growth lately, cryptocurrency still remains very risky and highly volatile.

Another big concern for plan sponsors when it comes to cryptocurrency is that it’s not the best investment for a 401(k) plan in terms of liquidity. Which means, it can’t be easily converted to other cryptos or cashed out, at least for now.

Every advisor needs to weigh up whether or not bitcoin can be recommended as a potential investment in a 401(k), because clients will be asking about it, if they haven’t already. Here are just a few of the risks involved:

Cryptocurrency is opposed to the definition of traditional investments. The legal part of it is  unclear, sometimes cryptocurrency might be prohibited, if the IPS says so

  • The IPS guidance may require additional amendments related to unique issues involved in evaluating cryptocurrencies
  • Since cryptocurrencies have episodes of significant value reduction, it may put a fiduciary at risk for portfolio loss and potential damage to the employer’s reputation
  • The fees for offering cryptocurrencies in 401(k) plans may be higher that the fees for other more traditional investments, which may put a fiduciary at risk for a duty claim infringement


Best Practices for Financial Advisors


Taking into account all the risks, the advisor can offer cryptocurrencies as an option but the following practices are essential:

  • Providing cryptocurrencies with the 401(k) plan should be confirmed with the employer
  • The IPS guidance should be thoroughly checked, to make sure there’s no provisions prohibiting the use of cryptocurrencies in the plan
  • All IPS steps should be followed by fiduciaries in terms of selection and performance monitoring
  • Considering a limit on the amount of cryptocurrency is required to reduce potential risks related to volatility
  • Investing in cryptocurrency should be optional. It is the employees who should be able to choose what cryptocurrencies they want to invest into, and whether they want to include them in their plan at all
  • Providing employees with all the necessary information about cryptocurrencies is the advisor’s responsibility. Making sure that the plan participants acknowledge all the risks related to their choice of cryptocurrencies is crucial


A lot of employees, recently, are getting more interested in including cryptocurrencies in their 401(k) plans, and it’s a growing trend. However, despite the promise of making huge gains, new crypto options provide high risks that people need to be very wary of. Being a fiduciary, you should have a substantive conversation with a legal counsel and employees before making the choice that will be right for everyone involved.

If you are curious about cryptocurrency in your 401(k) plan, check out Rixtrema’s CoinOptimiser – a tool designed to assess your risks when investing in crypto.

Click here to learn more



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