Robo 401(k) providers are still open to crypto options

The cryptocurrency industry's recent troubles — the crumbling of FTX and BlockFi, the slide in crypto prices and a hostile regulatory environment — are unlikely to prevent financial-technology 401(k) plan providers from offering cryptocurrency in their 401(k) plans, several providers suggested.

"We haven't seen a diminution in overall demand and interest," said David Ramirez, the Menlo Park, Calif.-based CEO of ForUsAll Inc., referring to the company's new Alt401(k) cryptocurrency offering, which it launched in June.

On top of the 50 plan sponsors that have already turned on the cryptocurrency brokerage window in their 401(k) plans, Mr. Ramirez expects some 100 additional clients to go live with the offering in the next six to eight weeks.

Most of the 50 early adopters are technology, fintech and blockchain Web3 companies that were not surprised by the sharp decline in the crypto market because they had experienced multiple significant downturns before, most recently in 2018, 2020 and 2021, Mr. Ramirez said.

"Our crypto and technology clients understand these cycles," he said. "To date, we haven't seen significant concerns or questions from either plan sponsors or plan participants."

The plan sponsors that have rolled out the crypto window collectively have $65 million in their 401(k) plans with 15% of participants on average using the window, a rate of utilization that Mr. Ramirez says is in line with the company's expectations given the education, guidance and guardrails it put in place. The average allocation per participant to crypto is 3.7%, well within the company's 5% crypto cap.

Despite the recent blow to the crypto industry's reputation, Mr. Ramirez remains bullish on the future of digital currencies, citing rising interest in blockchain technology among financial institutions and central banks.

"Cryptocurrency is the predominant way to invest in blockchain technology, which we believe has the potential to be transformative," he said.

Mr. Ramirez pointed to the large and growing number of organizations already using blockchain technology, including Vanguard Group Inc., which he said has been using the technology for its index data for years.

"The power of blockchain to unlock so many new efficiencies in financial services is significant," Mr. Ramirez said.

Among fintech 401(k) providers, ForUsAll has been the loudest proponent of crypto, making a name for itself as the first to offer the investments within the self-directed brokerage windows of retirement plans. But other digital 401(k) providers are open to offering the investments despite warnings from regulators on the emerging and highly speculative asset class.

Ubiquity Retirement + Savings, for example, does not offer cryptocurrency in its 401(k) plans because none of the 3(38) investment managers with whom it partners are pushing for the asset class. If its 3(38) investment managers were to ask for cryptocurrency, however, Ubiquity would accommodate their request.

If they had a "strong belief" in wanting the asset class and had educated participants around cryptocurrency, "Ubiquity would support it from a trading and record-keeping standpoint," said Chad Parks, the founder and CEO of the San Francisco-based company.

"As a record keeper, we are neutral on whether to have crypto as an asset class in a retirement account or not," he said.

Vestwell Holdings Inc., meanwhile, is evaluating its options. "We are monitoring the evolving legislation around cryptocurrency and will continue to evaluate available options for savers on our platform," Vestwell CEO Aaron Schumm said in a statement. Mr. Schumm noted that in a survey of 500 retirement plan advisers in the summer of 2021, more than 2 out of 5 advisers (41%) said they believed participants were interested in incorporating a cryptocurrency strategy into their retirement savings plans.

Betterment at Work, the retirement plan services business of digital investment advisory provider Betterment LLC, is also monitoring the situation. While it does not currently offer crypto options in its 401(k) plans, it reviews investments on an ongoing basis to ensure that it has selected options suitable for participants' desired investing objectives, Betterment said in a statement.

"As crypto markets and the regulatory environment around retirement plans evolve, Betterment will re-evaluate the suitability of crypto investments within retirement accounts," it said.

Betterment does, however, have a new cryptocurrency offering for retail investors, which 401(k) participants can access outside their retirement plan by opening a separate retail investing account. The new offering, called Crypto Investing by Betterment, launched in October and consists of four crypto portfolios.

"Betterment does believe in investor choice," the company said in the statement.

Investor choice was one of the big reasons ForUsAll decided to launch its cryptocurrency offering. "A typical 401(k) generally has 15 to 30 traditional mutual fund options, while pension plans, family offices and other institutional investors have access to the complete investment universe, including private equity, venture capital and increasingly cryptocurrency," ForUsAll's Mr. Ramirez said.

He noted that because of the "potential transformative nature of blockchain technology," many large traditional financial institutions, such as Goldman Sachs Group Inc., Fidelity Investments, BlackRock Inc. and Bank of New York Mellon Corp. have all launched or announced cryptocurrency services for their institutional clients.

"We just don't think that everyday Americans should be left behind," he said. "We believe that they should have equal access to investment opportunities for wealth creation."

Regulators, though, are wary, with the Department of Labor warning plan fiduciaries in a release in March to "exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan's investment menu." In the release, the DOL said it would investigate plans that offer crypto investments in either their core investment menus or brokerage windows and "take appropriate action to protect the interests of plan participants."

ForUsAll challenged the DOL's stance. In a lawsuit filed in June, ForUsAll denounced the DOL's "arbitrary and capricious attempt to restrict the use of cryptocurrency in defined contribution retirement plans," saying the agency overstepped its authority and failed to follow a required notice and comment period.

"We don't believe that the Department of Labor was given the ability to unilaterally decide what asset classes are or are not investible," Mr. Ramirez said.

In its initial complaint, ForUsAll asked the court to "vacate and set aside" the DOL's guidance, but in October offered to drop the lawsuit provided the DOL agreed to certain concessions, including a stipulation that the guidance does not impose an obligation to monitor cryptocurrency investment options in brokerage windows.

"We're optimistic that there will be a swift resolution to the lawsuit," Mr. Ramirez said.

While the DOL guidance does not explicitly forbid cryptocurrency in defined contribution plans, it details the risks to participants' retirement accounts, including crypto's extreme price volatility as well as concerns over hackers and theft.

At least one fintech 401(k) plan provider is taking the risks to heart and saying no to cryptocurrency. Human Interest Inc. does not offer cryptocurrency investments and has no plans to do, said Wendy Baker, Human Interest's Greensboro, N.C.-based senior legal counsel for retirement products and compliance, in a statement.

"In fact, the leadership team at Human Interest is concerned by the plans of providers to offer speculative investments like cryptocurrency," she said.

Ms. Baker added that the company was especially worried about the potential for fraud and challenged other providers to think about fraud prevention and how crypto investments will be secured.

The company's concerns echoed one of the many raised by the Department of Labor in its guidance.

"Cryptocurrencies are not held like traditional plan assets in trust or custodial accounts," the DOL said. "Instead, they generally exist as lines of computer code in a digital wallet. With some cryptocurrencies, simply losing or forgetting a password can result in the loss of the asset forever."