Labor Department Criticizes Fidelity’s Bitcoin Plan

Mr. Khawar’s group works inside the Labor Department to regulate company-sponsored retirement plans. In the interview, he said he views cryptocurrency as speculative. There is “a lot of hype around ‘You have to get in now because you will be left behind otherwise,’” he said.

Mr. Khawar said he received a heads up from Fidelity the day before the company disclosed its plan to give the 23,000 companies that use its 401(k) services the option to put bitcoin on the menu. In the April 26 disclosure, Fidelity said that starting later this year, workers could allocate as much as 20% of their nest eggs to bitcoin. That threshold could be reduced by employers. 

“For the average American, the need for retirement savings in their old age is significant,” Mr. Khawar said. “We are not talking about millionaires and billionaires that have a ton of other assets to draw down.”

Companies, individuals and some local governments have recently begun embracing digital currencies for transactions, daily business and some trading. But there remain some skeptics in the business community, especially given the volatility in prices and given that the federal government hasn’t yet outlined a large regulatory framework. Last month, the Biden administration directed agencies across the federal government to produce reports on digital currencies and consider new regulations.

In response to the Labor Department’s comments, Fidelity said its bitcoin offering “represents the firm’s continued commitment to evolving and broadening its digital assets offerings amidst steadily growing demand for digital assets across investor segments, and we believe that this technology and digital assets will represent a large part of the financial industry’s future.”

Dave Gray, head of workplace retirement offerings and platforms at Fidelity, said earlier this week the offering would be limited to bitcoin initially. He expects other digital assets to be made available in the future.

The move by Fidelity, which administers 401(k)-style accounts for more than 20 million participants, came weeks after the Labor Department published guidance on March 10 highlighting serious concerns about cryptocurrencies in 401(k) plans. The agency cited factors including the market’s volatility and the lack of broadly accepted valuation methodologies investors can rely on to evaluate cryptocurrency prices. Since November, bitcoin has lost about 40% of its value.

Employers offering cryptocurrencies should expect regulators’ questions “about how they can square their actions with their duties of prudence and loyalty” under U.S. pension law, the department said in its guidance.

In Fidelity’s plan outlined this week, the firm said it planned to cap transfers and new contributions to its bitcoin offering at 20% of 401(k) account balances and payroll contributions. 

Mr. Khawar said he and his colleagues have scheduled a conversation with Fidelity to discuss some of the concerns that were highlighted in the March 10 guidance. Among the department’s specific concerns was the 20% figure, according to a senior department official. 

Mr. Khawar said the Labor Department has similar concerns with an offering from ForUsAll Inc., a 401(k) provider that announced last year a deal with the institutional arm of cryptocurrency exchange Coinbase Global Inc. That deal will allow workers in plans it administers to invest up to 5% of their 401(k) contributions in bitcoin, ether, litecoin and others via a self-directed digital-asset window. 

ForUsAll said it protects investors by offering education and guardrails that cap digital-currency allocations at 5%.

“At a time when foundations, endowments and now pension plans are investing in cryptocurrency, blocking access puts everyday Americans at a structural disadvantage, deepening an already wide retirement gap,” the company said in a statement. 

Mr. Khawar said the Labor Department isn’t banning cryptocurrency in 401(k)s. He said if employers think they can make a case for the asset and have addressed the agency’s concerns, “that is their decision.”

Another risk the Labor Department outlined with regard to cryptocurrency investing is the uncertainty surrounding its regulation. Mr. Khawar said he believes cryptocurrency has intriguing use cases, but that it needs “maturing” before people can put their retirement savings into it, including the development of consumer protections.

In response to industry arguments that the Labor Department’s March 10 guidance is overly aggressive, since it weighs in on the merits of a particular asset class, Mr. Khawar said, “We didn’t think we could view ourselves as a responsible regulator and say nothing. Should we have waited until people lost most of their retirement savings until opining on it?” 

“I don’t view this guidance as a forever and ever thing,” he said. “It is focused on this stage of development.”

Write to Anne Tergesen at [email protected]