For the past 15 years, automation has been one of the dominant trends in workplace retirement plans, such as 401(k), 403(b), and 457 plans. Today, at the vast majority of workplaces that offer these plans, new employees are automatically opted in as participants; their contribution rate is set, and oftentimes raised over time, automatically; and, more often than not, their money is automatically invested in a target-date fund. It’s been all about driving simplicity into retirement plans and complexity out.
Another priority among plan administrators has been conservatism. For example, most plans that offer a brokerage window prevent access to exchange-traded funds, partly out of a concern that such funds might prompt excessive trading by plan participants.
More recently, however, some plan administrators appear to be doing an about-face, adding — or planning to add — a number of more complicated and/or far riskier investment choices.
Fidelity administers 24,500 workplace retirement plans that contain $3.3 trillion, making it the largest 401(k) plan administrator by assets. Earlier this year, the company began offering a “digital assets account” to its clients. At the employers who choose to make the accounts available, workers can allocate a portion of their retirement savings to Bitcoin. To date, one other plan administrator, ForUsAll, also makes cryptocurrency investments available to its clients. When employers add that option, their workers gain access to six cryptocurrencies.
Both Fidelity and ForUsAll place caps on how much of a participant’s portfolio may be invested in cryptos — 20% at Fidelity and 5% at ForUsAll — and employers have the discretion to lower those caps.
Plan participants choosing to add cryptos to their portfolios pay an annual fee of 0.75% to 1.00% of their allocation. And, of course, they face added risks. The value of one Bitcoin has fallen from a high of $66,000 in November 2021 to $17,000 recently, a one-year decline of –74%.
Private equity and other “alts”
While workplace retirement plan administrators have long had the freedom to include a variety of “alternative” investment options in their plans, few do, mostly out of litigation concerns. However, a bill now making its way through Congress is aimed at encouraging greater availability of such investments.
Pennsylvania Sen. Pat Toomey, who is part of a bi-partisan congressional group sponsoring the Retirement Savings Modernization Act, believes more widespread use of alternative investments would be beneficial. Alternatives “will open the door to higher returns and a more secure retirement for millions of Americans,” he said.
Those alternatives include investments in commodities, public and private debt, digital assets, hedge funds, infrastructure, insured products and annuities, private equity, real assets, real estate or real-estate-related securities, and venture capital.
The Retirement Savings Modernization Act is aimed at raising awareness among retirement plan administrators that alternative investments are allowed but it would not provide any new legal protections for administrators who choose to make them available. Still, at least one plan administrator, ForUsAll, says it will soon offer numerous alternative investments beyond cryptocurrency to its clients.
Most of today’s workplace retirement plans are defined-contribution plans, not defined-benefit plans (i.e., pensions). But many savers are not comfortable having so much responsibility for their financial futures resting on their shoulders. According to the Employee Benefit Research Institute (EBRI), about 75% of 401(k) plan participants would like a “guaranteed income” option.
Enter the Setting Every Community Up for Retirement Enhancement, or “SECURE,” Act of 2019. The legislation provided new legal protections to plan sponsors in the event of an annuity provider failure, removing what has been one of the most formidable roadblocks to greater annuity availability within workplace retirement plans.
Some retirement plan annuities may look different than annuities sold elsewhere. For example, Blackrock’s new LifePath Paycheck, in essence, embeds an annuity within a target-date fund. Participants allocate 10% of their portfolio to a new “lifetime income” asset class beginning at age 55, growing to 30% by age 65. At age 59½, the participant may redeem this money and purchase an annuity.
When considering any type of annuity within your workplace retirement plan, be sure you understand how much income is being guaranteed, whether payouts are fixed or have an inflation provision, any fees involved (including surrender charges), and the financial strength of the issuing company. Also, compare what’s available within your workplace plan with options outside the plan. (For an annuities refresher, see Making Sense of the Annuity Puzzle.)
The permissible/beneficial divide
The apostle Paul once made an important distinction that’s relevant to this discussion: “‘I have the right to do anything,’ you say — but not everything is beneficial” (1 Corinthians 6:12).
Just because it may become permissible for you to invest in cryptocurrencies, other alternative investments, or an annuity in your workplace retirement plan, does not mean doing so will be beneficial. SMI has written newsletter cover articles about cryptocurrencies, alternative investments, and annuities and those articles would be good starting points for anyone considering such investments.
Also, take heed of a U.S. Department of Labor (DOL) warning that was aimed at retirement plan participants with access to cryptocurrencies but is more broadly applicable. When employers offer crypto in a 401(k), the DOL cautioned, “they effectively tell the plan’s participants that knowledgeable investment experts have approved the cryptocurrency option as a prudent option for plan participants. This can easily lead plan participants astray and cause losses.”