Anyone who followed Matt Damon’s advice to “fate the brave” during the Super Bowl and invested $1,000 in the crypto market suffered a staggering loss, dropping the value of those assets by 60% % above.
This small amount of activity in the crypto market is indicative of two major problems with this new asset class: its historical volatility and the lack of education of these assets by most potential investors. Given this, and the cautious regulatory environment, it is clear that cryptocurrencies have no place in the defined contribution plan lineup at this time.
This has not stopped some DC program administrators from making digital assets available to program participants soon if the program sponsor decides to provide this feature.
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Defined contribution plan sponsors may be watching closely for these initiatives to make cryptocurrencies more accessible to DC plan participants. For now, however, we at Mercer do not view cryptocurrencies or cryptocurrency-related assets as suitable investment options in a defined contribution plan. Here are three main reasons:
1. Volatility
Crypto proponents point out that Bitcoin last year was the best-performing asset class of the decade, with an annualized return of 230% when its price It reached $60,000. But since then, its price has fallen sharply, and as of July 27, it is around $21,500.
Of course, most of the stock market has entered bear territory, and with it cryptocurrencies. But volatility is the norm in crypto courses. According to Mercer’s analysis, the annualized standard deviation of Bitcoin’s monthly returns from 2015 to 2020 is about 80%, at least four times the volatility of publicly traded stocks.
Many experienced crypto investors may understand that these new markets reach new highs and then periodically crash, but most defined contribution plan participants probably do not. Most participants have no appetite for such high volatility—after all, as the primary tool people rely on when they retire, DC plans typically avoid making highly volatile asset classes available to participants alone.
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2. Lack of education
Given the amount of mainstream coverage surrounding crypto, it can be assumed that these assets have gone mainstream. Last year, however, only 16 percent of Americans said they had invested in them. According to Mercer’s work with some of the largest defined-contribution plan administrators, there is still a lot of work to be done to educate plan participants on how to build portfolios using crypto assets. This is critical because understanding these markets can be confusing and time-consuming—a sobering truth in the face of Americans’ lack of financial literacy and their desire to have professionals help them plan for retirement.
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3. Regulatory Environment
While many in the crypto industry cheered when President Joe Biden signed an executive order in March directing federal agencies to research and report on digital assets, There are also plenty of reasons to worry that the regulatory environment surrounding cryptocurrencies could create more confusion in the market. Concerns” about incorporating cryptocurrencies into investment portfolios. The agency wrote: “During the early stages of cryptocurrency history, the U.S. Department of Commerce was concerned about the trustee’s decision to allow participants in 401(k) plans to invest directly in cryptocurrencies or other value-related products. serious concern about the caution. cryptocurrency. The department cited the speculative and volatile nature of cryptocurrencies and the difficulty of understanding them as factors in their warnings.
Institutions that may be invested should not be subject to the arbitrary whims of institutions that do not have such powers .”)
Given the rapid decline in the crypto market, many believe that regulators may soon impose restrictions on the market. Therefore, it is prudent for defined contribution plan sponsors to take a data-driven approach to including these assets in the DC plan menu, although there may be a small number of participants that may claim these assets.
The cryptocurrency market is constantly evolving, so the above factors may be mitigated. But until then, we at Mercer don’t think crypto is a retirement account.
Holly Verdeyen is a Partner and Head of U.S. Defined Contributions at Mercer, an asset management firm .
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