Any person who followed Matt Damon’s advice that “fortune favors the brave” during the Super Bowl and invested $1,000 in the crypto markets has seen staggering losses, with the value of those assets falling by more than 60%.
This small amount of activity in the crypto markets demonstrates two major problems with this new asset class: its historical volatility and the lack of education about these assets among most potential investors. Given that, in addition to a cautionary regulatory environment, it’s clear that at this point crypto has no place in defined contribution plans.
This has not stopped some DC plan administrators from soon making digital assets available to plan participants, if the plan sponsor decides to make this feature available.
Read: This is why bitcoin won’t “diversify” your 401(k)
Defined contribution plan sponsors are likely to keep an eye on these moves to make crypto more accessible to DC plan participants. However, currently at Mercer we do not consider cryptocurrency or crypto-related assets to be suitable investment options in a deposit plan. Here are three main reasons:
1. Volatility
Cryptocurrency supporters point out that Bitcoin last year became the highest performing asset class of the decade, with an annualized return of 230 percent, when the price reached $60,000. But since then, the price has fallen sharply, standing at around $21,500 as of July 27 .
Of course, much of the stock market has entered bear market territory, taking crypto with it. But volatility is par for the course in crypto. According to a Mercer analysis, the annual standard deviation of monthly Bitcoin returns from 2015 to 2020 was about 80 percent, at least four times the volatility of publicly traded stocks.
Many experienced crypto investors may understand that these new markets reach new highs and then crash in cycles, but it is likely that most defined contribution plan participants do not. Most participants don’t have an appetite for such high volatility—after all, as the primary vehicle people rely on for retirement, DC plans generally avoid making highly volatile asset classes available to participants on a stand-alone basis.
Read: Why mutual funds can sabotage your retirement
2. Lack of education
Given the amount of mainstream coverage surrounding crypto, it can be assumed that these assets have gone mainstream. However, last year only 16% of Americans said they have invested in them. Based on Mercer’s work with some of the largest administrators of defined contribution plans, much remains to be done to educate plan participants about building a portfolio of crypto assets. This is important, as learning about these markets can be confusing and time-consuming – a sobering fact in the face of Americans’ lack of financial literacy and their desire for professionals to help them plan for retirement.
Learn how to shake up your financial routine at the Best New Ideas in Money festival on September 21 and 22 in New York. Join Carrie Schwab, President of the Charles Schwab Foundation.
3. The regulatory environment
Although many in the crypto industry cheered when President Joe Biden signed an executive order in March directing federal agencies to study and report on digital assets, there are many reasons to be concerned that the regulatory environment surrounding crypto could create more confusion in the markets .
The day after the president’s order, the Department of Labor warned 401(k) plans to “exercise extreme caution” in including crypto in portfolios. The agency wrote: “At this early stage in cryptocurrency history, the Department has serious concerns about the prudence of a fiduciary’s decision to expose participants in a 401(k) plan to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies.” The department cited the speculative and volatile nature of cryptos as well as the difficulty of understanding them as factors in the warning.
(There is pending litigation against the DOL that seeks to depart from this guidance, saying that where “assets may be invested should not be subject to the arbitrary whims of an agency that has no such authority.”)
Given the rapid decline in crypto markets, many believe that regulators may soon place restrictions on the market. Therefore, it is prudent for defined contribution plan sponsors to take a data-driven approach to including these assets in DC plan menus, despite a likely small minority of participants who may request them.
The crypto markets are constantly evolving, so it is possible that the factors outlined above could be mitigated. But until then, we at Mercer feel that crypto does not belong in retirement accounts.
Holly Verdeyen is a partner and US Defined Contribution Leader at the asset management firm Mercer.
Click here to view Mercer’s important notes.
