On August 7, the White House published an executive decree leading the Department of Labor, which regulates retirement investment, to accelerate access to alternative investments in the defined contribution sponsored by the employer (DC) Retirement plans, such as 401K. Alternative investments have been defined to include private market investments, real estate, basic products, infrastructure projects, life income strategies – and in particular, “assets in actively managed investment vehicles that invest in digital assets”. (Curiously, crypto was the only asset class where “actively managed” was specified in relation to the “direct or indirect” language used for everything else – a regulatory breadcrumbs that deserves to be explored.)
The cryptography industry – at least its asset management segment – applauded this last presidential order granting cryptography managers access to a 12 -dollars of US dollars in very sticky American investment. The Coindesk coverage included industry reactions like this Bitwise Matt Hougan: “This order does not concern the government which says that” the crypto belongs to 401(K)s. ‘It is that the government is moving away and lets people make their own decisions. “”
This is where the problem lies: most people who participate in 401K plans do not make their own decisions or make it in a hurry. In fact, there is a law in place to ensure that participants do not have to decide at all.
The 2006 pension protection law has solved a thorny problem for employers: what to do when participants 401K do not choose their own investments. Previously, employers faced a potential responsibility for any default investment that has poorly performed. The law offers employers protection against the secure port if they make default elections a “qualified default investment alternative” (Qdia) – Generally a target or balanced fund. The HR departments no longer had to worry about being prosecuted for choosing the “bad” default option.
Although this has resolved the problem of the employer’s responsibility, he created an opportunity for people to neglect one of the most important investment decisions of their lives. Participants generally join their 401K during chaos to start a new job – dealing with health insurance, taxes, integration and learning of labor. Faced with investment choices that they do not understand, many simply accompany the flow and accept the default option that their employer has selected, often a target date with a retirement date that corresponds roughly to their age. The GlidePath concept – automatically passing from shares to obligations with retirement approach – creates a false feeling of security. Participants assume that they are “all put” simply by not withdrawing and never reviewing the decision. Years or decades can pass.
The “How America Saves” report by Vanguard “How America” reveals the remarkable adhesion of the default values: 61% of the plans now offer automatic registrations, reaching 94% of the participation rates against only 64% for voluntary registration. Almost all of the self-registration registration plans designate the target date funds as defect, and among the plans with qualified default investment alternatives, 98% use target date funds. The result? An astonishing 84% of participants use target date funds, with 64% of all the contributions that include it – against only 46% in 2015. The most revealing of all: 71% of target investors hold only one fund on target date, and only 1% of these purs “investors” carried out transactions in 2024, demonstrating the way in which 1% powerfully.
So, why not include allocations or digital asset strategies in target date funds or other QDIA, giving access to the widest set of participants in DC plan? Incitations do not seem to be there. Participants, employers, target date fund managers and DC holders all have limited incentives to modify the status quo. Each layer of this system benefits from the accumulation and conservation of assets. Fund managers may have incentives to introduce new types of investment potentially for yield or to better diversify, but they must travel several guards to reach investors who could even look at their choices. And employers will certainly not argue for change.
The irony is rich: the system designed to democratize retirement economies has democratized not to choose at all.
Of course, some employees deeply care about the investment options of the DC plan and require their employers to add choices for alternatives and crypto. We are not worried about these people – they will find a way – but they are in the minority. The error consists in assuming that all young workers, or any demographic group, would uniformly adopt access to cryptography in their 401K plans. The reality is that most participants in all age groups operate on the automatic pilot. If digital assets connect for more years as among the most efficient asset classes, it will be a shame if the vast majority of 401K participants who perform default elections will not come for the journey.
