New opportunity to build wealth in retirement plans at work
It's Tuesday, April 26th. I'm Ric Edelman. The big news this morning: Fidelity has announced that it's going to allow workers to buy bitcoin in their 401(k) plans. Those 401(k) plans managed, of course, by Fidelity.
Fidelity is not only one of the nation's largest money managers, it's also the nation's largest provider of 401(k) plans. Fidelity has a third of the market. More than 23,000 companies use Fidelity's 401(k) program to deliver this very important employee benefit and retirement savings strategy to workers across the country. All told, Fidelity is managing. $2.4 trillion in 401(k) plans. Now, they plan roll this out later this year, by June or July for you be able to buy bitcoin in your Fidelity 401(k), but your employer is going to have to allow it. It's going to be one of the available investment options.
So start talking with your employer now, if this is something you think you might want to go do. The fee Fidelity is going to charge for a bitcoin investment is somewhere between three fourths of 1% and 0.9%. It’s pretty much right in line with aggressive stock funds, emerging market funds, small cap value funds, aggressive growth funds, foreign investments, and so on. The fee is not unusually high at all, and Fidelity promises that their fee schedule will remain competitive.
Early Adopters Are Excited to Offer Bitcoin to Employees
Some companies are already signing up. MicroStrategy has done it first. According to Fidelity, other employers have already reached out to them to engage in conversation about this. Bitcoin will be an offering just like any other mutual fund is available in the 401(k) plan. One limitation - and this is interesting - Fine print: Fidelity will not allow you to place more than 20% of your portfolio into bitcoin, ensuring that you maintain a diversified position. Bitcoin is perfect for 401(k) plans. Now that might seem to be a little bit of a surprise and shock. Why would that be?
I mean, after all, bitcoin is incredibly volatile with massive price fluctuations throughout its history. Seven times bitcoin has suffered market declines of 50% or more, most recently in the past several months. Back in November, bitcoin hit its all-time high of 69,000 and it's now trading for about 40,000. That’s a huge price decline.
The Power and Simplicity of Dollar Cost Averaging
But that's exactly why this makes perfect sense to add bitcoin to a 401(k) plan. It's because of dollar cost averaging. Look, you understand that the best time to invest is when prices are low, right? You're not supposed to invest when prices are high. The only problem is, we never know when that is. We don't know if prices are low right now and about to go higher or whether prices are high right now and about to go down. Dollar cost averaging solves the problem for us.
Let me illustrate. When your dollar cost averaging, you're not investing a set amount of money all at one time. Instead, you're investing a small amount over regular intervals. Ordinarily, say you invest $100 a month or $6,000 a year into an IRA. But think about your 401(k) at work. You're not making a lump sum investment. You're investing a little bit of your paycheck every time you get paid. Most folks get paid twice a month. Your pay is the same every pay period. And so your contribution into your 401(k) is the same every pay period. Let's say, for example, that you're paid $100,000 a year. And that you get paid twice a month. You get 24 paychecks in a year. That's a pay of about $4,200. And let's say that you contribute 5% of your pay into your 401(k). That's a contribution of about $200 with every paycheck. In other words, roughly every two weeks you're contributing $200 into the plan. That is ideal for dollar cost averaging $200 every two weeks. You see, that dollar amount doesn't matter and the interval doesn't matter.
Consistent Investing Is The Key
What matters is that you're consistent and that's the whole key, because by being consistent, you smooth out the volatility of the market. You see, if you're contributing $200 this week and bitcoin's price is very high, well, you're not going to get to buy very many shares. On the other hand, if the price of bitcoin is very low, you're going to load up and you'll accumulate lots of shares.
In other words, with dollar cost averaging, without you having to give it any thought or effort, you will automatically get lots of shares while prices are low. But you only buy a few shares when prices are high, so you will have an extraordinarily efficient accumulation of shares. And when you do the mathematical calculation, which we're not going to bother to do here today, you're likely discover that you end up with an average cost of shares that is mathematically always less than the mathematical price of shares. Think about that. The cost is lower than the price. This demonstrates that you'll end up with a built-in profit and that is wonderfully exciting. This is why you want to invest in extraordinarily volatile investments in a 401(k) plan.
A Good Way to Take Advantage of Market Volatility
It wouldn't make any sense to put your money into a fixed account where the share price is always a dollar, because if there's no fluctuation in price, you can't take advantage of dollar cost averaging. And this is why financial advisors routinely tell their clients that when you're dealing with dollar cost averaging and when you're using your retirement plan at work, you should choose the riskiest, most volatile investments you can find - that's what's going to help you maximize the benefits of dollar cost averaging. Historically, you've probably done your dollar cost averaging with stock funds and hopefully, the most volatile of stock funds like growth funds or sector funds or foreign stock funds. Now you have an opportunity to use something that is even more volatile than any of them: Bitcoin. This is a wonderfully exciting opportunity for wealth creation in your retirement plan at work. And Fidelity's leading the way.
Is the DOL Out of Step?
Oh, one other final point. Fidelity has made this announcement only weeks after the Department of Labor warned companies not to do this. Fidelity's move is a finger in the DOL’s eye. The Department of Labor's recent announcement said that they threaten to investigate any 401(k) provider that adds bitcoin or other digital assets to its offerings.
Well, that is ridiculously out of step. The Department of Labor is basing its analysis on years old data: fears of volatility, the fact that bitcoin might become worthless, and the fact that criminals are sometimes using this for illicit purposes. All of that is ancient history in the bitcoin world.
The fact is, according to the most recent data, bitcoin is used in illicit transactions 0.15% of the time. Cash, by the way, is used in illicit transactions 2% of the time. So before thinking of banning bitcoin because of criminals, you might want to consider banning cash.
Biden’s Crypto Executive Order To Get Federal Agencies to Work Together
The Department of Labor is totally out of step, even with its own White House.
A month ago, President Joe Biden issued the first ever Executive Order on crypto. It called for the federal government to bring together the full forces of its resources to develop and foster the innovation of digital assets. Secretary of the Treasury Janet. Yellen has recently called blockchain technology “transformative” and it's that technology that allows Bitcoin to exist.
Even Elizabeth Warren, not merely a US. Senator; she's the US. Senator from Massachusetts, where Fidelity is headquartered, has changed her view. A year ago, she was highly negative on crypto. Now she says the Federal Reserve needs to create a central bank digital currency. She says the time has come for that to happen. So now you have folks like Janet Yellen, who previously hated crypto, and Elizabeth Warren, who previously hated, crypto, all on board with the president's executive order to foster the development and innovation of this new asset class.
The Department of Labor will soon be changing its tune as well, and Fidelity isn't waiting. Talk to your employer now about the opportunity for you to invest part of your retirement savings into bitcoin. It's a wonderful retirement security and wealth creation opportunity. To learn more about the investment thesis of bitcoin and other digital assets, read my new book The Truth About Crypto available from your favorite bookseller and be sure to tune in to my weekly radio show, The Truth About Your Future. You can listen, live or download the podcast to get air times and dates and listen to the show. Just go to The TruthAYF.com. I'm Ric Edelman.