In a deal that could change the retirement-plan market forever, a group of employees can finally invest in cryptocurrency for their 401(k) plan. Coinbase (COIN) struck a deal with ForUsAll, a 401(k) provider, to allow workers to invest up to 5 percent of their 401(k) contributions in bitcoin, ether, litecoin, and other coins. A startup founded in 2012, ForUsAll is a young player in the retirement-plan market. It has just $1.7 billion in retirement-plan assets, versus the $22 trillion retirement-plan market, but this can be the catalyst for future adoption by larger 401(k) providers like Fidelity and Vanguard.
Here’s how it will work: Participants will be restricted to investing up to 5% of their balances in cryptocurrency. If the value goes over 5%, ForUsAll will send alerts that urge participants to re-balance their portfolios by selling some crypto and transferring the profits into stocks and bonds. What’s more, if the balance in crypto holdings exceeds 5% of a portfolio’s total assets, an employee would not be able to transfer any more of their current balance into it.
This “safeguard” makes Paul Selker, president of Spark Street Digital, feel comfortable offering the cryptocurrency option from ForUsAll to his employees. “They’re not going to let my people YOLO Dogecoin to the moon,” he said of ForUsAll. Selker believes that offering cryptos can be an alluring way to lure young investors into the stock market. Most of his employees are in their 20s and 30s, so he predicts that they would “be more engaged” with the 401(k) plan if they could invest in cryptos.
And this is an important point. The old adage notes that the earlier a person invests, the bigger returns they will earn down the road. This is because compound interest needs time to work its magic. After all, Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.”
Unfortunately, young people, who are under 35, are the least likely to own investments in the stock market -- even though the time to invest is most critical at that age group. Here’s the chart by Pew Research Center:
As much as 94 percent of crypto buyers are between 18-40 years old, according to Stilt. So, making crypto available for 401(k) could be an important step in getting more younger people involved with investing. The partnership also democratizes access to modern allocation strategies. The biggest issue with the current 401(k) plan is how it’s fallen behind the high-performance allocation strategies. You are often limited by popular stock brokerages (such as Vanguard or Fidelity) to the same strategy that your grandparents have used -- mutual funds or exchange-traded funds. Yes, the limitation exists for a reason. It’s designed to protect investors from making amateur mistakes.
However, that strategy may not be the soundest way to invest, because the financial world simply looks different from 20 years ago. For example, the value of assets managed by hedge funds exploded by 3,136% from 1997 to 2020, according to Statista:
If we look at the most respected institutions, we will find that nearly all of them have adapted to the changing landscape by allocating capital in the alternative investment areas, such as ESG funds, private equity, real estate, and even crypto. For example, Harvard’s endowment fund has an allocation in hedge funds (36.4%), private equity (23%), equities (18.9%), real estate (7.1%), cash (5.6%), fixed income/TIPS (5.1%), natural resources (2.6%) and other real assets (1.3%). 401(k) plans, on the other hand, allocate only 1% of their assets in private equity and 2% in hedge funds, according to Defined Contribution Institutional Investment Association.
As a result, wealthy institutions have access to alternative investments that may offer higher returns while regular investors are limited to mutual funds and ETFs. ForUsAll, who manage plans for companies like Target, Coca-Cola and Citigroup, said on its website that “6 out of 10 institutional investors feel that digital assets have a place in their portfolio and 36% are already using it.”
Bottom line: Institutions are following the trend by allocating a percent of capital to cryptocurrency, and the partnership of Coinbase and ForUsAll is a groundbreaking step to offer everyday investors the same opportunity to grow wealth through modern financial assets as institutions.
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