- 401(k)s can include bitcoin in retirement portfolios without breaching their fiduciary duty
- Fiduciary duty is an inalienable right that fund managers owe to their clients or investors
- The draft bill will make amendments to the existing Employee Retirement Income Savings Act
A draft bill presented to the American congress proposes to include Bitcoin and other cryptocurrencies among products Retirement Investment Plans- 401(k)s. Retirees can include bitcoin in retirement portfolios without breaching their fiduciary duty.
The draft bill will make amendments to the existing Employee Retirement Income Savings Act (ERISA of 1974). This will allow fund managers to offer and invest in digital assets without breaching their fiduciary duty. The bill is expected to be presented in November after the mid-term elections.
Republican Senators Pat Tooney, Tim Scott and Peter Meijer are sponsoring a bill that could change the appcryptocurrency investment approach. The bill will seek to change the list of investments that fund managers can include in asset portfolios.
401(k) Retirement Investments
The 401(k) is a retirement savings plan of the defined contribution variety. In defined contribution plans, investors contribute a known amount to a fund handled by a fund manager or pension scheme. The fund manager goes on to invest these accumulated contributions.
At maturity (retirement), the policyholders are awarded their money back, including investment returns. Contrast this with the defined benefit retirement plan, which awards a known amount upon maturity. However, defined contribution plans also mean there is risk associated, and as such, they are more tightly regulated.
Fiduciary duty is an inalienable right that fund managers owe to their clients or investors. It is a duty of care that requires fund managers to ensure the relative safety of the funds they are entrusted with. Breach of fiduciary duties comes with penalties that are prescribed in statutory law. In the case of defined contribution plans such as 401(k) plans in America, fund managers have a fiduciary duty to recommend safe assets for investment. Assets such as equities, minerals and commodities make the list. Digital assets are not included in this list, and as such, fund managers are liable for losses suffered by investors if the fund invests in digital assets.
This is distinct from defined benefit plans in which the fund manager must pay out a known retirement amount upon maturity. So if the fund were to suffer losses due to investing in digital assets such as cryptocurrency or bitcoin, the manager would still have to provide the same amount at maturity. They assume responsibility and carry the risk.
The Bill will put digital assets and cryptocurrencies on the same list as equities and minerals when it comes to 401(k) plans. So if the fund manager suggests investing in Bitcoin or the investor requests it, if things go South, the fund manager is not liable for the losses; they would not have breached a fiduciary duty.
Why is this important for Bitcoin and cryptocurrencies
I know you already feel like you’ve been dragged down a financial rabbit hole but let’s explore this a little bit more. Retirement funds work because people contribute every month or as they earn. Eventually, in retirement, they claim their benefit. Hence, a 25-year-old who will retire at 55 will park their first contribution in the fund and, therefore, the asset for 30 years.
In finance, we call this kind of money patient capital. Long-term funds will not likely be recalled soon. Generally, these are coveted by insurance companies because they allow investment in long-term projects. One of the cryptocurrencies’ recent undoings is the crypto winter which claimed around 75% of Bitcoins’ value from its all-time high.
The Central Bank of Kenya Governor Njoroge cited this as a major problem with using Bitcoin as a reserve currency. One reason given is the short-term (or impatient) capital that is being invested in cryptocurrencies. Volatility is bad for investment. One year into using Bitcoin as a reserve currency, El Salvador is another cautionary tale. Their reserves are roughly 60% less than what they purchased.
Patient capital would make cryptocurrencies much less susceptible to short-term shocks. Reducing the volatility and improving cryptocurrencies’ functions as a store of value. Patient capital does not react to short-term events as violently as impatient capital. A person with a 30-year outlook on Bitcoin is much more concerned with its 5 or 10-year position than its 3-month position.
This is good news for cryptocurrency markets all over the world, but it’s not time to celebrate yet. In 2022 the US has stepped up in the quest to bring digital assets into the regulatory fold. However, bills do not pass easily in the US congress and must ascend to the senate thereafter. The bill contains more than the amendments to digital assets, but it may well have the part on digital assets removed to get it through. All this to say, we should watch for developments in this story.