Fidelity Investments shocked the retirement industry last month with its move
available in 401 (k) plans. Add up the income you could bring and it will be less of a surprise.
Fidelity is the largest administrator in the country of 401 (k) s, overseeing 23,000 plans. Workers pay a portion of their salary into the plans of each pay period, often receiving a match from their employers. Contribution limits are $ 20,500 in 2022 with an additional $ 6,500 for workers over the age of 50.
Fidelity managed $ 2.7 trillion in 401 (k) assets at the end of 2021. The Boston company said it would allow employers to add a Bitcoin account to 401 (k) later this year, putting Bitcoin on the menu in addition to holding stock and bond mutual funds. .
What’s in it for Fidelity? A background calculation shows that it could bring in hundreds of millions of additional revenue, though probably many years later.
Fidelity says it will charge fees between 0.75% and 0.9% for the digital assets account, with undisclosed transaction fees. The company says it will limit Bitcoin to a 20% balance of 401 (k).
Assuming a 1% to 5% allocation for investors, Fidelity could earn between $ 203 million and $ 1.2 billion in administrative fees from its Bitcoin accounts, not including transaction fees. Assuming 10% of its $ 2.7 trillion assets eventually go to Bitcoin, Fidelity could collect more than $ 2 billion in annual administrative fees.
Admittedly, 10% in Bitcoin may be unattainable, at least in the short term. Some proponents of cryptocurrencies say the appropriate allocation of Bitcoin for average retirement savings is between 1% and 5%. (Critics, of course, say assigning zero is more reasonable.)
It is unclear whether as much as 1% of Fidelity 401 (k) assets will soon go into cryptocurrencies. While employers will have the option of adding digital asset bills, it is far from certain that many will opt for this option, in part because of legal obligations.
“The primary motive for sponsors is not to be sued,” said Ron Surz, a veteran of retirement counseling and head of Target Date Solutions. Adopting Bitcoin into plans is likely to depend on its performance over the next few years and cryptocurrency ownership fees, said Surz, who believes it could take 10 to 20 years for the asset class to become a significant part of the 401 (k) asset.
One difficulty may be the Labor Department, which may be preparing to bring down 401 (k) allowing investors to hold cryptocurrencies. The department said in March that employers offering cryptocurrencies should expect to be asked about how such a move matches their fiduciary obligations. Following Fidelity’s move, a senior DOL official doubled, expressing serious concerns about the suitability of cryptocurrencies as a means of retirement.
Nor will Congress give any clarity. Senator Tommy Tuberville (R.-Ala.) On Thursday said he was introducing a law that would prevent DOL from banning Bitcoin or other assets in plans 401 (k). But such a law faces high prospects in the Democrat-controlled Senate, where lawmakers like Elizabeth Warren (D.-Mass.) Have already questioned Fidelity’s plan.
Employers may also be wary of being sued by investors for offering volatile investments such as Bitcoin, which could expose them to lawsuits for breach of fiduciary duty. A recent survey of plan sponsors found that only 2% said they would consider adding cryptocurrency to the 401 (k) menu.
Still, Fidelity is playing a long game. Company officials said they see the Bitcoin product as just the beginning, with the goal of expanding to other digital assets.
Fidelity is also building institutional trading and custody services for cryptocurrencies. The company could thus capitalize both on the retail side, through plans 401 (k), and on its institutional side.
How much Bitcoin will bring to Fidelity, of course, is not known. The company could lose assets that are being transferred from its mutual funds to digital accounts, and product fees could be reduced as its assets grow and face new competition.
The change also comes at a glacial rate of 401 (k) s. In 2006, DOL issued new rules that, for example, made it much easier for companies to automatically enroll employees. More than a decade later, only 62% of plans use this feature, according to the Sponsor Council of America Plan.
Still, if Fidelity were to get as much as $ 500 million a year from Bitcoin – which is a mid-range figure – there would be nothing to snoop on. Last year, Fidelity had total revenue of about $ 24 billion.
The company declined to comment on its potential Bitcoin revenue.
If digital assets one day grab a good chunk of the retirement portfolio, pushing Fidelity’s fees into other products, a little bitcoin could help a lot.
Write to Joe Light at [email protected]