Bitcoin As a Retirement Plan Investment?

The cryptocurrency is legally permissible as a 401(k) investment under ERISA, but some plan sponsors may have questions about whether it is prudent.

Bitwage launched what it touted as the “world’s first Bitcoin 401(k) plan” in May.

Bitwage provides cryptocurrency payroll and invoicing services. It says the 401(k) offering is a four-way strategic collaboration between Bitwage, Leading Retirement Solutions, Kingdom Trust and Gemini. Leading Retirement Solutions provides the administration and recordingkeeping for the 401(k) plan. Kingdom Trust is the custodian, Gemini provides a secure and compliant exchange solution and Bitwage acts as a concierge for the company and employees to navigate between all four companies.

“We have spent the past year building our solution with a flagship client and recently made it available to plan sponsors,” says Kirsten Curry, CEO and attorney at Leading Retirement Solutions in Seattle.

But what is Bitcoin anyway?

Bitcoin is the first implementation of a concept called “cryptocurrency,” or a virtual or digital currency. In simple terms, each bitcoin is a computer file stored in a “digital wallet” application on a smartphone or computer. People can send bitcoins to another digital wallet, and every transaction is recorded in a public list called the blockchain. Some people, called miners, lend their computing power to verify other users’ transactions, so that the same bitcoin isn’t spent twice. In return, they receive new bitcoins. People like Bitcoin because it is decentralized—not controlled by any bank or government—and is fully transparent.

And bitcoins can be used to buy things. Since the cryptocurrency was created in 2009, a number of major companies accept bitcoin as payment, according to several websites, including Microsoft, Overstock and many BMW dealerships in the United States and United Kingdom. But some people like to trade or mine bitcoin in hopes the currency will increase in value. Kingdom Trust CEO Ryan Radloff calls bitcoin “the digital Millennials’ version of the gold bug in the 1970s.”

“Soon after that [rush], gold was introduced as an investment in retirement accounts,” he says. “Investors now have the same continued frustration with government control over currency and the lack of transparency.”

Though Bitcoin is not controlled by the government, the IRS has issued guidance telling taxpayers that income from virtual currency transactions is reportable on their income tax returns. The IRS treats virtual currency as property.

Is Bitcoin a Prudent Investment for Retirement?

While Kingdom Trust is the custodian for the Bitwage 401(k) offering, Radloff says the firm is focusing right now on its individual retirement account (IRA) offering called Choice IRA, which gives retirement investors the ability to access both legacy market and emerging digital market assets, as well as alternatives such as gold, in one account. Radloff says his firm holds about 150 retirement accounts.

“With Choice, we flipped the agenda of the firm to not only cater to RIAs [registered investment advisers] but to individual savers,” he says. “We also have various technologies and service providers helping us bring the best product to market for savers.” Radloff says the Choice IRA uses Fidelity Digital’s institutional grade custody solution for Bitcoin. “We use its storage facility to power our retirement market to store bitcoin. It’s a sub-custody agreement with a technical solutions provider for holding bitcoin,” he explains. Radloff adds that with the weight of the Fidelity name, Kingdom Trust has seen thousands join the wait list for opening a Choice IRA since the program was announced.

Radloff says most people coming to the Choice IRA website already own bitcoin. “More than 10 million people have bitcoin, and more than 7 million also have a retirement account. They believe in its value, but they are not able to own in it in their retirement account,” he says.

Radloff says people interacting with bitcoin in retirement accounts are expressing the view that, just like Apple and Tesla stock, bitcoin will be more valuable in 10 years. “When they are ready to exit their position [in bitcoin], they will sell if for dollars, just like they would sell stock,” he says. “The reason the price goes up for bitcoin is more and more people are demanding it. Those who have bought bitcoin know that and it is causing them to be bullish on bitcoin.”

However, Radloff notes, “if you ask 10 professional fund managers, you won’t have all 10 believe in bitcoin.” And any internet search about the return on investment of bitcoin will produce many articles about how volatile and risky bitcoin is as an investment.

Curry says 401(k) service providers and plan sponsors have historically shied away from allowing non-traditional investments in a 401(k) plan for a few reasons, one being risk. However, she notes, “Bitcoin continues to become more mainstream, with the Office of the Comptroller of the Currency [OCC] ruling as recently as July that national banks can hold cryptocurrency, including in a fiduciary capacity, and would have the authority to manage bitcoin in the same way that a bank can manage other assets.”

The Employee Retirement Income Security Act (ERISA) does not generally prohibit a 401(k) plan from providing access to a particular type of asset, so long as the asset is made available to participants who should be eligible to invest in it, Curry says. “Thus, ERISA does not prohibit bitcoin as an available investment option in a 401(k) plan.”

Rather, Curry says, ERISA prescribes what is required when offering access to investments. “When adding bitcoin as an available investment option there are ERISA requirements, including disclosure requirements, that apply just as they do to traditional assets like mutual funds,” Curry says. “Plan participants should be provided with timely and appropriate notice that this type of digital asset is available as an investment opportunity. The risk, performance, cost and more should be properly disclosed to participants so they can make informed decisions as to investing in this type of asset.”

Radloff says Kingdom Trust’s 401(k) plan offers bitcoin as an investment option. “Employees can use those assets or not. It’s a choice,” he says.