How Blockchain Can Change 401(k)s


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Blockchain, the technology behind cryptocurrencies such as bitcoin, could actually change the way we manage 401(k)s. Pundits claim blockchain represents the biggest breakthrough since the internet, with the potential to improve just about everything in our lives, including our health and bank balance. Here’s how it might also increase the amount of money we have to live on in retirement.

Key Takeaways

  • Having everything stored in one easy-to-access place would give people a clearer picture of their retirement assets and perhaps incentivize them to invest more.
  • More activity and interest should put pressure on financial institutions to work harder to retain clients and lead to better returns.
  • Blockchain doesn’t require a third-party intermediary to validate transactions, resulting in speedier turnaround times and potentially lower costs.
  • The technology, thanks to its decentralized structure, is more difficult to hack.
  • Issues that need to be overcome include its energy consumption, relative lack of speed, and the fact that each block in the chain can hold only so much data.

What Is Blockchain?

Unless you’ve been living on another planet for the past decade or so, you probably have heard of blockchain. It is a digital ledger that records anything that needs to be logged and verified as having taken place securely and simultaneously across a network of computers. Every time something new happens, a record is automatically added to this type of online Excel document. And that record is safe, cannot be tampered with, and is theoretically accessible to everyone.

In short, this technology offers a much more potentially secure, trustworthy, efficient, and organized way to record data than we currently have. While that might not sound particularly special, it is actually a pretty big deal.

What Impact Can Blockchain Have on 401(k)s?

One thing that could really do with being saved by a technological breakthrough is the U.S. retirement system. Increasing life expectancy, mismanagement, low mobility, a lack of trust, too many stakeholders, and limited transparency are just a few of the issues that threaten to leave a significant portion of the population without the resources to live comfortably when they get old and leave the workforce.

Blockchain, if it lives up to its potential, could help to reduce these headwinds and breathe life back into retirement savings. Below we list some of the key ways that this highly hyped technology might make one of the darkest clouds hanging over the economy go away.

More Transparency

Faith in the financial institutions that manage retirement plans isn’t exactly soaring, and part of that is due to a lack of transparency. Inconsistent information, hidden charges, and the use of jargon put many people off bothering to save for retirement.

A shared decentralized ledger could perhaps help to remedy this problem. Having everything stored in one easy-to-access place would give Americans a clearer picture of their retirement assets and perhaps incentivize them to invest more. A better-informed population would also be more likely to make smarter investment decisions and not just go with the default option.

No More Lost Funds

These days people have a tendency to change jobs fairly frequently. In some cases, when they leave a job, they also leave an old pension behind.

In the U.S. it is basically up to employees to keep tabs on all their 401(k)s from previous jobs or merge them into their new employer’s plans. There is no pension database that keeps track of workers’ total defined contributions or someone who takes care of making sure retirement savings move where the employee goes.

Sadly, this means it is quite common for people to lose track of where all their retirement accounts are held and forfeit some of the money they worked hard to put aside for their later years. In 2017 NBC News reported that American workers could be losing a collective $2 trillion in retirement savings simply by failing to roll over their 401(k) savings accounts when they change jobs. In 2021 the financial services company Capitalize said there were 24.3 million forgotten 401(k) accounts worth about 20% of all 401(k) assets in the U.S.

Blockchain could put an end to this mess. With this technology it would suddenly be possible to keep track of all of our retirement accounts in one easy-to-access place.

24.3 Million

The number of 401(k)s that have been forgotten, according to estimates from Capitalize.

Cut Out the Middlemen

One of the most hyped things about blockchain is that it doesn’t require a third-party intermediary such as banks and clearinghouses to validate transactions. When money or something else changes hands, it instantaneously gets logged on multiple computers that in theory are accessible for all to see.

The significance of this is huge. Cutting out the middlemen should trigger faster results and lower costs. With fewer people taking a cut, more of your money is invested, resulting in a bigger pension pot.

Keep Providers on Their Toes

Having all your information related to retirement savings stored in one easy-to-access location should arguably put pressure on financial institutions to work harder to retain clients. A common problem today is that retirement plans are seldom monitored by their owners. Should blockchain live up to its promise and change this, asset managers will no longer be able to take customers for granted. When the threat of them shopping around, jumping ship, and demanding more becomes reality, providers will, in theory, be forced to offer more-competitive terms, hopefully resulting in lower costs and higher quality products.

Less Hackable

In recent years there has been a spike in the number of 401(k)s that have been hacked. Most attacks lead to personal information being stolen, although online criminals are now increasingly taking money from people’s plans, too.

Blockchain could help put an end to this. Information on the blockchain network is located in a shared database that exists on millions of computers rather than in one central location. That decentralized structure, according to experts in the field, makes it more difficult to hack.

Hurdles Still to Overcome

The benefits of blockchain have been touted for several years now, yet the technology has still not been widely adopted. Why is that? As we’ve seen with other big breakthroughs in the past, it takes time for a potentially game-changing invention to be transformed into a flawless system that can be safely and efficiently used by the masses.

In 2017 research firm Gartner predicted that blockchain was still 10 years away from going mainstream. It said five to 10 years in 2019, indicating we still have a way to go before this technology is tried, tested, and ready to become part of our everyday lives.

Some of the biggest issues that need to be ironed out before blockchain can feasibly become scalable for widespread use include the amount of energy it consumes to function, its relative lack of speed, and the fact that each block in the chain can only hold so much data.

Another concern is that uniting 401(k)s with blockchain could lead cryptocurrencies to become a permanent fixture in retirement plans. The U.S. Department of Labor, the body in charge of making sure that employer retirement accounts meet the minimum standards set by the Employee Retirement Income Security Act (ERISA), has made it fairly clear that it’s against this idea, due to the speculative and volatile nature of these digital currencies.

When Could Blockchain Become Mainstream?

Despite all the hype, blockchain still has some way to go before perhaps becoming the primary system in which all our transactions and records are logged. In 2019 Gartner said five to 10 years could be enough for blockchain to win over skeptics, eradicate its flaws, and be trusted with such important tasks. Still, that’s just an estimate, and things may turn out very differently.

Can My 401(k) Invest in Cryptocurrencies?

A handful of 401(k) plan fiduciaries are beginning to permit investors to invest a portion of their retirement savings in cryptocurrencies, despite some resistance from the U.S. Department of Labor. Employers are generally in a tough spot. A Pew Research Center survey conducted in September 2021 showed that roughly 31% of young Americans, those age 18 to 29, have invested in, traded, or used a cryptocurrency, almost double the participation rate of Americans overall. Companies must decide whether to acknowledge this interest and allow crypto investments in 401(k)s knowing that it could lead to people’s retirement money going up in smoke and a series of lawsuits.

Does Fidelity Offer Crypto for 401(k)?

Yes. Fidelity recently said it would give employees the chance to invest up to 20% of their 401(k)s in bitcoin— if their employers will allow it.

The Bottom Line

Blockchain has the potential to vastly improve the living standards of the retired portion of the population. Greater transparency and efficiency should boost engagement, lower costs, and ensure the money we put aside each month is put to its best use and given the greatest chance to grow in value.

The bad news is it could take a while for that exciting prospect to become reality. As things stand, blockchain still has plenty of hurdles to overcome before becoming ready for the mainstream. There’s also a chance that it will never make it that far and be superseded by something else, as yet unknown, that is even more capable.

By diana

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