Fidelity Investments shocked the retirement industry last month with a move to make
available in 401(k) plans. Add up the revenue that might bring in, and it starts to be less of a surprise.
Fidelity is the country’s largest administrator of 401(k)s, overseeing 23,000 plans. Workers plow part of their paycheck in the plans every pay period, often getting a match from their employers. Contribution limits are $20,500 in 2022 with an additional $6,500 for workers over age 50.
Fidelity administered $2.7 trillion in 401(k) assets at the end of 2021. The Boston-based firm said it will let employers add a Bitcoin account to 401(k)s later this year, putting Bitcoin on the menu next to mutual funds holding stocks and bonds.
What’s in it for Fidelity? A back-of-the-envelope calculation shows it could bring in hundreds of millions in additional revenue, albeit likely many years down the line.
Fidelity says it will charge fees between 0.75% and 0.9% for the digital assets account, in addition to undisclosed transaction fees. The company says it will limit Bitcoin to 20% of a 401(k) balance.
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 in assets eventually goes into Bitcoin, Fidelity could rake in more than $2 billion in annual administrative fees.
Granted, 10% in Bitcoin may be unattainable, at least near-term. Some crypto proponents say a suitable Bitcoin allocation for an average retirement saver is between 1% and 5%. (Detractors, of course, say an allocation of zero is more reasonable.)
It’s unclear whether even 1% of Fidelity’s 401(k) assets will get into crypto any time soon. While employers will have the option to add a digital-assets account, it’s far from certain that many will choose that option, partly due to legal liabilities.
“The primary motive for sponsors is to not get sued,” said Ron Surz, a pension consulting veteran and head of Target Date Solutions. Bitcoin’s adoption in plans will likely depend on its performance over the next several years and fees for owning the crypto, said Surz, who thinks it could take 10 to 20 years for the asset class to become a significant part of 401(k) assets.
One hitch could be the Labor Department, which may be about to crack down on 401(k)s that allow investors to hold crypto. The department in March said employers who offer crypto should expect to be questioned about how such a move squares with their fiduciary duties. After Fidelity’s move, a top DOL official doubled down, expressing serious concerns about crypto’s suitability as a retirement asset.
Congress isn’t likely to provide any clarity either. Sen. Tommy Tuberville (R.-Ala.) on Thursday said he is introducing a bill to prevent the DOL from prohibiting Bitcoin or other assets in 401(k) plans. But such legislation faces long odds in the Democratic-controlled Senate, where lawmakers like Elizabeth Warren (D.-Mass.) have already questioned Fidelity’s plan.
Employers may also wary of being sued by investors for offering a volatile investment like Bitcoin, which could expose them to lawsuits for breach of fiduciary duty. A recent poll of plan sponsors found that only 2% said they would consider adding crypto to a 401(k) menu.
Still, Fidelity is playing the long game. Company officials have said they see the Bitcoin product as just the start, aiming to expand to other digital assets.
Fidelity is also building out institutional trading and custody services for crypto. The company could thus capitalize on both the retail side, through 401(k) plans, and its institutional side.
How much Bitcoin will bring into Fidelity isn’t known, of course. The firm could lose assets that shift out of its mutual funds into digital accounts, and the product’s fees could come down as its assets grow and it faces new competition.
Change also comes at a glacial pace in 401(k)s. The DOL in 2006 issued new rules that made it much easier for companies to auto-enroll employees, for instance. More than a decade later, only 62% of plans use that feature, according to the Plan Sponsor Council of America.
Still, if Fidelity were to gain even $500 million a year from Bitcoin–a mid-range figure–it would be nothing to sniff at. Last year, Fidelity had total revenue of about $24 billion.
The company declined to comment on its potential Bitcoin revenues.
If digital assets one day grab a good chunk of retirement portfolios, pressuring Fidelity’s fees in other products, a little Bitcoin could go a long way.
Write to Joe Light at email@example.com