Digital Assets Might Fit Differently in DC Plans Than Other Alternative Assets

On any given day, as Ary Rosenbaum sits at his monitor watching the bitcoin ticker, he could be up or down significant money. He knows he would not sell when the digital currency has a bad trading day, or even a poor week, but he is not sure the average investor would hold firm.

“It could hit 120 [thousand] and fall to 110 [thousand] the next week,” Rosenbaum says, referring to the price of owning a single bitcoin and highlighting the volatility of the asset, which has ranged in price from less than $108,000 in late August to more than $120,000 in early October, before dipping again to less than $105,000 on November 4.

Rosenbaum, an ERISA attorney at the Rosenbaum Law Firm P.C., where he advises plan sponsors on fiduciary liability, invests in bitcoin, but he cautions against investors immediately incorporating it into retirement plans.

“With private equity, you’re going to have less volatility,” he says. “But bitcoin: It’s my favorite in terms of making money, but I would never put that in the hands of a plan participant.”

In recent months, the retirement industry has been considering the potential for increased inclusion of alternative assets in retirement plan investments, spurred on by President Donald Trump’s August executive order, which directed regulators to offer guidance on how plan sponsors can effectively integrate these investments into their plans. Earlier in the year, in May, the DOL reset its stance to “neutral” concerning the inclusion of crypto in DC plans.

Not a New Concept

While the inclusion of alternative investments in defined contribution plans is not new, their adoption has been limited, mostly because of plan sponsors’ litigation concerns.

According to the Callan DC Index, which monitors the performance, asset allocation and cash flows of more than 100 large defined contribution plans totaling about $400 billion in assets, DC plans have allocated funds to alternatives since at least 2006, when the index was created. In the first quarter of 2025, just 0.1% of assets were allocated to alternatives, a figure that has consistently stayed below 1% since the index was introduced.

Digital assets are relatively new, having first been introduced in the early 2000s, and the most popular cryptocurrency, bitcoin, was established in 2008.

However, most alternative assets — including private equity, private credit, real estate and infrastructure — enter the defined contribution discussion with well-worn playbooks. Their challenges of illiquidity, valuation complexity and high fees are familiar to fiduciaries who have worked to address the concerns for years. Digital assets, however, bring a fresh mix of volatility, evolving regulation, custody risk and behavioral unpredictability. In the closed, legally constrained world of Employee Retirement Income Security Act plans, those unique dimensions require a different standard of caution and a different framework for implementation.

“If a plan sponsor did want to add digital assets, the most prudent approach would be to add an exchange-traded fund focusing on bitcoin, since it is the largest and most established cryptocurrency,” says Amy Arnott, a portfolio strategist for Morningstar. “Or [it could add] an ETF with slightly more diversified exposure to a small group of digital assets.”

Implementation

Unlike private equity and private credit, which many investors believe should be included in target-date funds or managed accounts with a maximum allocation of about 15%, digital assets are considered a better fit for ETFs. Investment experts suggest that the allocation cap for digital assets should be even lower, recommending a maximum allocation of 5% accessed through an ETF.

Mindy Yu, senior director of investing at Betterment, says ETF wrappers make digital assets much more tradeable and also give them protection from Securities and Exchange Commission scrutiny.

“Digital assets, particularly bitcoin and ethereum, over time have evolved,” she says. “It is still highly volatile, but now there are ETF wrappers that make them more, in a way, tradable and more efficient than accessing [them] through a wallet.”

Trump’s executive order explicitly recognizes the necessity for proactive management of digital assets, independent of any regulatory guidance. The order refers to “holdings in actively managed investment vehicles that are investing in digital assets,” indicating that any digital asset investment in a 401(k) plan would be actively managed.

Still, the persistent threat of litigation that has long stifled the adoption of alternative investments in DC plans is a trend many expect is unlikely to change, even with anticipated friendlier regulatory guidance.

For fiduciaries weighing the appropriateness of digital assets for their plans, addressing potential complaints about their evaluation process is crucial, says Erin Cho, a partner in Mayer Brown specializing in ERISA matters.

“ERISA doesn’t require fiduciaries to guarantee performance, but they must maintain a thoughtful, well-documented process for assessing any asset class, ” Cho says.

Brokerage Windows

A more straightforward and cautious approach for plan sponsors wishing to provide their participants access to digital assets is through an existing or the addition of a self-directed brokerage window. This option could involve fewer risks of implicating the sponsors, sources say.

In fact, plan participants utilizing a brokerage window generally have a significantly higher allocation to alternative investments than participants using traditional plan investment menus. According to the Callan DC Index, alternatives are prevalent in approximately 6.6% of DC retirement accounts that invest through brokerage windows, with about 1.4% of assets accessed via these windows specifically allocated to alternatives.

But Lauren Valastro, an assistant professor at Texas Tech University School of Law who authored forthcoming research about the prudence of cryptocurrency investments in 401(k) plans, cautions that self-directed brokerage windows should not be viewed as a silver bullet for plan sponsors.

“The overwhelming body of research shows that people generally aren’t able to generate higher overall returns using brokerage windows when compared to the returns they could make from plan menu investments,” she says. “We have fiduciaries for a reason. They have the experience, they have the expertise, and I think, for most American workers, the studies show our attempts to direct our own investments through brokerage windows are not successful.”

Brokerage windows allow plan participants to invest their retirement funds in a wider range of options beyond those available in their DC plan menus, giving participants the flexibility to choose their preferred investments. In 2023, 21% of Vanguard full-service plan sponsor clients offered a brokerage window option, according to an April 2025 report by Vanguard.

One concern about using brokerage windows is that they often have higher fees, Valastro says. In addition, she pointed out in a recent publication that participants in a retirement plan might be tempted to allocate more funds to cryptocurrencies than is advisable, according to standard diversification principles.

She also warns that they could fall prey to the gambler’s fallacy mistakenly thinking that the results of separate events are connected, which may lead them to make poor investment decisions.

“Even if someone were able to figure out a solid investment approach using a brokerage window, any higher return generated is almost always eroded by fees,” Valastro says. “For example, many of the investments offered in brokerage windows are not the institutional [share] class offerings that plan menus offer.”

As Valastro puts it, the difference between institutional and retail share classes is like choosing to pay vending machine prices for a bag of chips when you could get much better value by buying in bulk at Costco.

Rosenbaum rode bitcoin down to $16,000 after buying it for $69,000 and bought more when the price tanked. Now, the digital currency trades at more than $100,000. But a 401(k) plan is not the best place to make such bets, Rosenbaum says, noting that any plan that did allow access to digital assets would likely have a cap of 5% or less.

“Sometimes plan sponsors have to protect participants from themselves,” he says.