Fidelity Brings Bitcoin To Retirement Accounts
The retirement situation in America is dismal. According to a recent Bankrate survey, more than 50% of US workers say that they are behind on their retirement savings. At least 1 in every 3 people report that they don’t even have a retirement account.
To make the situation worse, 51% of Americans say that they have previously taken an early withdrawal from their retirement savings and the economic chaos caused by COVID-19 hasn’t helped either.
One strategy to help lessen the blow of financial duress later in life led to the creation of pension plans. The idea was that employees and employers would put money in, the investment teams would grow the money over time, and the employees would get paid out a portion of the proceeds in retirement. This is a great idea on the surface, but the main problem is that most pension plans have been drastically underperforming their target investment returns, which means that they won’t have enough money to pay retirees when the bill comes due.
According to Richard M. Ennis, a prominent institutional investment consultant who was previously CEO of the respected consulting firm EnnisKnupp and edited the prestigious Financial Analysts Journal, said in an interview with Marketwatch:
“The bottom line on public fund performance is that underperformance of 152 bps [1.52%] per year on $4.5 trillion in assets [for the 12 years ending June 30, 2020] translates to an outright waste of stakeholder value of $68 billion annually, a figure I find astonishing.”
If the public pension funds have a tough time underperforming standard benchmarks, while simultaneously missing their actuary rate of returns, there is a risk that the 25+ million Americans counting on their pension fund for retirement will get an unwelcome surprise.
So what exactly is the solution to the retirement problem in America?
I wrote a letter to each of you in December of 2018 titled “Every pension fund should buy bitcoin.” In the letter, I argued the following:
The retirement of hundreds of millions of corporate and government employees around the world depends on these pension funds’ ability to pay the individual a set amount of money post-retirement. Unfortunately, many pension funds are facing a significant crisis — it does not look like they will be able to pay their future obligations.
The difference between the obligations and the resources allocated to pay them is actually widening. This is driven by a decreasing worker to retiree ratio. Workers pay into the pension fund (think of this as revenue for the pension fund) under the promise that the fund managers will grow the capital and be able to pay the employee’s pension post-retirement. Once an employee retires, they begin to draw their pension (think of this as expenses for the pension fund) and will continue to do so until they die.
The gap between revenue and expenses is getting worse because of lower birth rates (fewer people entering the workforce) and longer life expectancy (the retirement age stays fixed so people are entitled to their pension for longer). Each of these trends is expected to continue, and possibly even accelerate, which will put additional pressure on pension funds to come up with the capital needed to fulfill their obligations.
I then went on to discuss a potential solution being the purchase of bitcoin:
If the thesis plays out how I anticipate though, an investment of 100 basis points or less would materially change the performance of each pension fund, which ultimately changes the future viability of retiring for hundreds of millions of people. These institutions have permanent, long-term capital which allows them to stomach more volatility than most investors.
For example, an investment of 1% of assets at $4,000 BTC price would yield a 25% increase in the pension’s total assets if Bitcoin reached $100,000. If a fund decided to invest 0.1% of assets, the same price appreciation would increase total assets by 2.5%.
Obviously bitcoin’s price has not yet reached $100,000, but the rise to $40,000 means that a 1% allocation would have increased a pension fund’s assets by 10% so far. This would close the underfunding gap for a large portion of pensions in the United States.
While we wait on more pensions to purchase bitcoin, there is a light at the end of the tunnel for individuals. Fidelity announced this morning that they will be the first major retirement plan to allow investors to put bitcoin in their 401k plans. According to the Wall Street Journal coverage, “Employees won’t be able to start adding cryptocurrencies to their nest eggs right away, but later this year, the 23,000 companies that use Fidelity to administer their retirement plans will have the option to put bitcoin on the menu. The endorsement of the nation’s largest retirement-plan provider suggests crypto investing is moving further into the mainstream, but it remains to be seen whether employers will embrace it for their workers.”
A quote in the article stuck out to me as well. It came from Dave Gray, head of workplace retirement offerings and platforms at Fidelity, saying:
“There is a need for a diverse set of products and investment solutions for our investors. We fully expect that cryptocurrency is going to shape the way future generations think about investing for the near term and long term.”
Whether you think bitcoin is a great investment or not, it is interesting to see that Fidelity wants to increase the optionality for clients. They realize that there is a significant problem around retirement preparation and bitcoin could provide a solution.
My guess is that we will see every retirement platform follow suit and start offering bitcoin to their clients. The older clients may refrain, but this will likely be adopted in mass by the younger generations. For better or worse, this younger generation doesn’t want to hold gold, bonds, or cash. They treat bitcoin like a reserve asset and ultimately see a big reason (inflation) to be invested fully in the market. There are few better ways to gain investment exposure than through a tax-advantaged account.
Now Fidelity may be the first large retirement plan to offer this solution, but they aren’t the first. There are options like Choice by Kingdom Trust, BitcoinIRA, and many others who pioneered this idea. This combination of incumbents and startups bringing this opportunity to market signals that the trend is only beginning.
Bitcoin is not the solution to everything and it may not be the complete solution to the retirement crisis in America, but it can definitely have a positive impact. It is encouraging to see Fidelity creating solutions to help investors pursue this path if they desire.
Hope each of you has a great start to your day. I’ll talk to everyone tomorrow.
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