Is this the end of the line for crypto in retirement accounts?
After starting the year with high expectations, 2022 has evolved into an “annus horribilis” (to borrow a phrase from the late Queen Elizabeth II) for crypto holders. Not only has crypto blue chip bitcoin demolished speculators and true believers alike by sinking from more than $47,000 per coin to less than $16,000 year-to-date, but one of its leading trading platforms, FTX, suddenly collapsed last week, taking down its high-flying, shorts-wearing (former?) billionaire founder Sam Bankman-Fried along with it.
The FTX breakdown is convenient for plan fiduciaries, including outside consultants and internal committees, who were struggling with the prudence of permitting crypto within an employer-sponsored retirement plan, said Matthew Eickman, national retirement practice leader at Qualified Plan Advisors. In his view, it confirmed and justified the trepidation they already felt.
“It provided a tangible, widely reported proof point that the downside to crypto is much more extreme than other traditional investment options. The best evidence of an investment that could go to zero is one that did go to zero,” said Eickman.
That said, Eickman believes the troubles at FTX could also bear long-term positive fruit for crypto investments because the situation will heighten transparency and accountability.
“If crypto becomes a more solid investment in the future, the extreme nature of the FTX bankruptcy may be one cause of that positive development,” he said.
As for the drop in digital coin prices, the economic and monetary forces instrumental in crypto’s rise have substantially abated, if not totally reversed, over the course of the year. No longer do investors feel pressured to hold stocks or other risky assets -- even in their retirement accounts -- because of low yields across the fixed-income universe. No longer is there the desire not to be left behind (or in crypto lingo: “FOMO,” for fear of missing out) that has pushed millions of investors to dive headlong into cryptocurrencies.
In other words, from here on in, crypto investors better darned sure know what they are getting into.
“Advisers supporting clients with crypto investments in retirement accounts must take extra precautions to ensure they understand the outsized risk and shifting compliance landscape. U.S. regulators will likely take action in the coming months to enhance consumer and market protections, and advisers and firms must take steps today to best serve clients with crypto exposure,” said Mitch Avnet, CEO of Compliance Risk Concepts.
Ryan Johns of SFG Wealth Advisors also feels that the FTX bankruptcy could be a healthy turning point for crypto in the long run due to increased regulation. In the meantime, however, he “cannot recommend putting them into any core retirement account as they are simply too speculative.”
“The FTX debacle is a good demonstration of why and, more broadly, highlights the pitfalls associated with investing in an unregulated space," Johns said. "That said, the crypto landscape is maturing, and further regulation could make it more stable. So stay tuned.”
Meanwhile, on Capitol Hill, Democratic Sens. Elizabeth Warren of Massachusetts and Richard Durbin of Illinois used the FTX collapse to voice their negative opinions about cryptocurrencies and retirement plans in a Monday letter to Fidelity CEO Abigail Johnson.
The senators reminded Johnson that more than 32 million Americans and 22,000 employers trust Fidelity Investments with their workplace retirement accounts and employer-sponsored plans, which is why the firm should stop pushing to expand investment options beyond traditional choices, especially into an industry dominated by "charismatic wunderkinds, opportunistic fraudsters, and self-proclaimed investment advisors promoting financial products with little to no transparency."
“In light of these risks and continuous warning signs, we again strongly urge Fidelity Investments to do what is best for plan sponsors and plan participants -- seriously reconsider its decision to allow plan sponsors to offer Bitcoin exposure to plan participants. By many measures, we are already in a retirement security crisis, and it should not be made worse by exposing retirement savings to unnecessary risk," Warren and Durbin wrote.
"Any investment strategy based on catching lightning in a bottle, or motivated by the fear of missing out, is doomed to fail,” they added.
New York Attorney General Letitia James also weighed in Tuesday, urging congressional leaders to adopt legislation that would prohibit investing retirement funds in digital assets, such as cryptocurrencies, digital coins and digital tokens. With recent crypto market crashes and other market turbulence, James stressed the need to protect workers’ retirement funds and avoid the dangers of “risky cryptocurrencies.”
“Investing Americans’ hard-earned retirement funds in crashing cryptocurrencies could wipe away a lifetime’s worth of hard work,” James said.
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