How blockchain can change 401 (k) s
Blockchain, the technology behind cryptocurrencies like bitcoin, can actually change the way we manage 401 (k) s. Pundits claims blockchain represents the biggest breakthrough since the internet, with the potential to improve just about everything in our lives, including our health and bank balance. In this way, it can also increase the amount of money we have to live on in retirement.
Important takeaways
- Having everything stored in one place that is easily accessible will give people a clearer picture of the pension funds and perhaps motivate them to invest more.
- More activity and interest should put pressure on financial institutions to work harder to retain customers and lead to better returns.
- Blockchain does not require a third-party intermediary to validate transactions, resulting in faster processing times and potentially lower costs.
- Technology, thanks to its decentralized structure, is more difficult to hack.
- Problems that need to be overcome include energy consumption, relative lack of speed and the fact that each block in the chain can only contain so much data.
What is Blockchain?
Unless you’ve been living on another planet for the last decade or so, you’ve probably heard of blockchain. It is a digital ledger that records everything that needs to be logged and verified that has happened securely and simultaneously across a network of computers. Each time something new happens, an entry is automatically added to this type of online Excel document. And that record is safe, can not be tampered with, and is theoretically accessible to everyone.
In short, this technology offers a much more potentially secure, reliable, efficient and organized way of recording data than we have today. While it may not sound very special, it is actually a pretty big deal.
What impact can blockchain have on 401 (k) s?
One thing that can really do to be saved by a technological breakthrough is the US pension system. Increasing life expectancy, poor governance, low mobility, lack of trust, too many stakeholders and limited openness are just some of the problems that threaten to leave a significant section of the population without the resources to live comfortably as they age and leave the workforce.
Blockchain, if it lives up to its potential, can help reduce this headwind and breathe life back into retirement savings. Below we list some of the key ways in which this highly hyped technology can make one of the darkest clouds hanging over the economy disappear.
More openness
Belief in the financial institutions that administer pension schemes is not exactly sky-high, and some of it is due to a lack of transparency. Inconsistent information, hidden fees and the use of jargon mean that many do not care about saving for retirement.
A shared decentralized ledger may help solve this problem. Having everything stored in one easily accessible place will give Americans a clearer picture of the pension funds and perhaps motivate them to invest more. A better informed population will also be more likely to make smarter investment decisions and not just go with the standard option.
No more lost funds
These days, people tend to change jobs quite often. In some cases, when they leave a job, they also leave an old pension.
In the US, it is basically up to employees to keep track of all their 401 (k) s from previous jobs or merge them into their new employer’s plans. There is no pension database that keeps track of the employees’ total contributions or someone who ensures that the pension savings move to where the employee goes.
Unfortunately, this means that it is quite common for people to lose track of where all their pension accounts are kept and lose some of the money they worked hard to set aside for recent years. In 2017, NBC News reported that U.S. workers could lose a total of $ 2 trillion in retirement savings simply by failing to roll over 401 (k) savings accounts when they change jobs. In 2021, the finance company Capitalize said there were 24.3 million forgotten 401 (k) accounts worth about 20% of all 401 (k) assets in the United States
Blockchain can put an end to this mess. With this technology, it would suddenly be possible to keep track of all our pension accounts in one easily accessible place.
24.3 million
The number of 401 (k) s that have been forgotten, according to estimates from Capitalize.
Cut out the middlemen
One of the most hyped things about blockchain is that it does not require a third-party intermediary such as banks and clearing houses to validate transactions. When money or something else changes hands, they are immediately logged on to several computers that in theory are available to everyone.
The significance of this is enormous. Cutting out intermediaries should trigger faster results and lower costs. With fewer people taking a cut, more of your money is invested, resulting in a larger pension pot.
Keep suppliers on their toes
Having all the information related to pension savings stored in one place that is easily accessible should undoubtedly put pressure on financial institutions to work harder to retain customers. A common problem today is that pension schemes are rarely monitored by the owners. Should blockchain live up to the promise and change this, asset managers will no longer be able to take customers for granted. When the threat of shopping around, jumping off the ship and demanding more becomes a reality, suppliers will in theory be forced to offer more competitive terms, hopefully resulting in lower costs and higher quality products.
Less hackable
In recent years, there has been an increase in the number of 401 (k) s that have been hacked. Most attacks lead to personal information being stolen, although online criminals are now increasingly also taking money from people’s plans.
Blockchain can help put an end to this. Blockchain network information is housed in a shared database located on millions of computers instead of in one central location. The decentralized structure, according to experts in the field, makes it more difficult to hack.
Obstacles that still need to be overcome
The benefits of blockchain have been discussed for several years now, but the technology has still not been widely used. Why? As we have seen with other major breakthroughs in the past, it takes time for a potentially game-changing invention to be transformed into a flawless system that can be safely and efficiently used by the masses.
In 2017, the analysis company Gartner predicted that blockchain was still 10 years away from becoming mainstream. It said five to ten years in 2019, indicating that we still have a way to go before this technology is tested, tested and ready to become a part of our daily lives.
Some of the biggest problems that need to be solved before a blockchain can become scalable for widespread use include the amount of energy it uses to function, its relative lack of speed and the fact that each block in the chain can only hold so much data.
Another concern is that merging 401 (k) s with blockchain could lead to cryptocurrencies becoming a permanent part of pension schemes. The US Department of Labor, the body responsible for ensuring that employers’ pension accounts meet the minimum standards set by the Employee Retirement Income Security Act (ERISA), has made it quite clear that it is against this idea, due to the speculative and volatile nature of these digital currencies.
When can Blockchain become mainstream?
Despite all the hype, blockchain still has some way to go before it may become the primary system where all our transactions and records are logged. In 2019, Gartner said that five to ten years could be enough for the blockchain to win over skeptics, eradicate errors and be cleared with such important tasks. Still, it’s just an estimate, and things can turn out very differently.
Can my 401 (k) invest in cryptocurrencies?
A handful of 401 (k) plan managers are beginning to allow investors to invest part of their retirement savings in cryptocurrencies, despite some opposition from the US Department of Labor. Employers are generally in a tough situation. A survey from the Pew Research Center conducted in September 2021 showed that approximately 31% of young Americans, ages 18 to 29, have invested in, traded, or used a cryptocurrency, nearly double the participation rate for Americans overall. Businesses must decide whether to recognize this interest and allow crypto-investment in 401 (k) s knowing that it can lead to people’s pension money going up in smoke and a number of lawsuits.
Does Fidelity Crypto Offer 401 (k)?
Yes. Fidelity recently said it would allow employees to invest up to 20% of their 401 (k) say bitcoin – if employers allow it.
The bottom line
Blockchain has the potential to significantly improve the standard of living of the retired part of the population. Greater transparency and efficiency should increase commitment, reduce costs and ensure that the money we set aside each month is used in the best possible way and given the greatest chance to grow in value.
The bad news is that it may take a while before the exciting prospect becomes a reality. As it is, blockchain still has many obstacles to overcome before it gets ready for mainstream. There is also a chance that it will never get this far and will be replaced by something else, as yet unknown, that is even more capable.
