What’s Good for Them

Photo by Silver Orchid Photography

Anxious armchair investors continue to search for opportunities, despite the early 2022 market turmoil. We may have moved on from the “meme stocks” of last year, but whenever some investment craze gets media attention—especially when there are undercurrents of David vs. Goliath or “average Joe strikes it rich”—you can be sure we’ll see people rushing to join in. The latest rage is “digital assets” such as cryptocurrencies and non-fungible tokens (NFTs).

Recently, Capitalize, a fintech company that consolidates 401(k) accounts into a new or existing employer-sponsored plan or individual retirement account (IRA), surveyed 821 employees and 203 financial experts about cryptocurrencies.
Most (57%) of the employees surveyed by Capitalize view digital assets as volatile investments, with 45% labeling them as risky. It seems however, that volatility and riskiness don’t matter to these employees, as 61% responded that digital assets are a strong retirement investment option.

It was striking to see—despite the continual reminders from experts to ride out market volatility, despite the fact that people notoriously buy high and sell low because of emotional trading—how many of the survey’s respondents still thought digital assets are a good retirement or long-term investment option. In fact, nearly three in five said they’d like to see digital asset options added to their employer-provided retirement plans.

And—perhaps reinforcing the notion that people view these types of opportunities overly optimistically—the survey found that respondents who invest in digital assets in their retirement portfolios expect to retire eight to 13 years earlier than those who don’t!

But, of course, not all whims should be satisfied. Almost two-thirds of the survey’s adviser respondents wouldn’t recommend retirement investors allocate funds to a digital asset. The challenge for retirement plan advisers is to help plan sponsors understand why they shouldn’t give in to the squeaky-wheel participants clamoring for access and put such options into their plan lineups.

Your clients will likely be asked about adding such investments to their plan—or they, themselves, might be the ones asking. Digital assets might be seen as an appropriate part of an overall portfolio—after all, a significant percentage of the financial advisers in the survey expressed a growing confidence in such options. Yet, that doesn’t make them appropriate for a retirement plan lineup—and that’s the message that is sometimes hard to convey.

Volatility generally doesn’t make for a good retirement plan vehicle, as most investment policy statements (IPSs) would red flag using such unstable investments. And, as far as performance over time—one of the most common benchmarks for retirement plan investments—most digital assets don’t fare well here either; most are too new to have such a record. What’s the benchmark against which to measure these things anyway?

For some perspective, let’s ponder the implications of putting these into the plan. We don’t know what will happen now in Hughes v. Northwestern University, as the Supreme Court just sent it back to the lower court to reconsider. But Northwestern’s argument that there were so many options from which to choose—200—that participants could make the right selections wasn’t sufficient to insulate the sponsor from participant claims. In the case of digital assets, you could see a court saying that even making such options available—even with limitations or guidance—isn’t prudent or the right fiduciary choice.

We try to get sponsors to say “yes”—e.g., to adding better plan design features and options for engagement—but this is one time you’ll have to advise them to say “no.” And that’s in everyone’s best interest.