Should a retirement-services provider be its customers’ super-fiduciary?

Senators Durbin, Smith, and Warren implore Fidelity, a non-fiduciary, not to allow retirement plans’ fiduciaries even to consider whether to allow an account that invests in bitcoin as a possible investment some participants might choose for a portion (but no more than 20%) of an individual’s account. https://www.durbin.senate.gov/imo/media/doc/durbin_bitcoin_72622.pdf

The letter’s opening sentence asks “why Fidelity . . . would allow plan sponsors the ability to offer plan participants [a choice about whether to invest in] Bitcoin.” Not openly stated is a worry that some plans’ fiduciaries’ decision-making—about whether a participant should be allowed a choice—might be imprudent.

If one reads the letter as an effort to persuade Fidelity to change its business decision, it asks that Fidelity act as a super-fiduciary, preventing plans’ fiduciaries from making an imprudent decision by not presenting a choice to them.

BenefitsLink neighbors, what do you think: Should a retirement-services provider sometimes recognize that many customers lack enough expertise to evaluate prudently everything that might be offered, and so limit what the provider offers?

The short and practical answer is "no."  

Of course morons shouldn't be allowed to invest in bitcoin, but where do you draw the line? How do you determine who is a moron (other than wanting to invest in bitcoin 😉). If some is ok, why is 20% ok, and not 15%, or 5%, or whatever.

And frankly, why are retirement plans so special that they need special rules? Someone could be saving in a non "retirement account" for retirement. Now that I'm nearing the end of my career, I wouldn't care if they did away with "retirement" plans altogether. Lots of silliness for questionable gains, IMO. 

(I didn't start out cranky but sure can get there quickly.)

I think the original question is being posed backwards, and the fiduciary relationship is possibly being misunderstood by members of the US Senate. Selection of retirement plan service providers is a fiduciary decision; for selection of an investment provider, the fiduciary needs to consider (among other factors) the investment alternatives offered by the provider. If Fidelity's offering is not prudent, then the fiduciary has a duty to select a different provider.

If the fiduciary lacks the experience to determine whether the investment menu is suitable for the plan's participants, then they should retain an investment advisor or other professional who is qualified to help them make that decision. 

If an official, and presumably well-crafted and reviewed, letter from the most august legislative body the English-speaking world cannot use “begs the question” properly, we cannot expect them to understand ERISA fiduciary nuances.

The misuse of “begs the question” for the purpose of sounding sophisticated, elegant, or erudite simply proves the opposite.

And if the government believes that cryptocurrency is inappropriate for retirement savings, it can easily legislate to that end, as it has for other exotic or questionable assets. Oh, wait, I forgot that we do not have an ability to legislate anymore.

Cranky

While I am at it, this is an opportunity to reiterate my disapproval of a statute that encourages plans to throw unsophisticated individuals to the wilds of self-directed investment as a refuge from the bogeyman of fiduciary liability.

Bird, C.B. Zeller, and QDROphile, thank you.

To follow one of Bird’s points and QDROphile’s second point, a challenge for fiduciaries who set a participant-directed retirement plan’s investment alternatives is choosing whether to make an alternative available to an intelligent, knowledgeable, thoughtful investor who could use the alternative skillfully, knowing that a plan’s investment alternative is available to all participants, and so risks that some less capable participants might carelessly select the alternative.

C.B. Zeller’s last sentence is what fiduciary law provides.

Yet, there are some who question the economics of asking every employer’s plan, no matter how small, to engage separate advisers.

QDROphile, perhaps we share a suspicion that the Senators publish their letter because they are mindful of Congress’s ineptness.

Others with different or more observations?

I struggle with the use of alternative investments as options in participant directed plans because usually such decisions are driven by one or more stakeholders at the owner or management level who fancy themselves knowledgeable and sophisticated investors, whether they are or not is irrelevant, for the purpose of catering to their preferences rather than as a fiduciary prudent decision for the benefit of all participants. Should such plans offer crypto, hedge funds, real property? Certainly they could be strategic components of a well diversified retirement portfolio, but what limiting parameters should be imposed, if any, and what sort of investment education is provided to protect Joe Lunchbox (and is there a sophistication level sign-off, like brokerages often require before you can trade options)?

I can see a 55-year-old retail middle manager who got a very late start saving for retirement after putting kids through college, sees Bitcoin trading at $20k and knows it was at $60k not that long ago and should get there again, and even knowing the risks (it went from $60k to $20k after all) invests 50-100% of his account in crypto. You can say it's a personal choice but it is also a retirement security and social issue - if a future crypto crash wipes out a billion dollars of retirement savings (on top of other normal stock market declines) who is left holding the bag? Tax payers supporting the social programs that end up being the safety nets for those making poor, ill-informed decisions.

If we were still in a pension-driven environment where SS and a DBP could deliver 50-60% or higher replacement ratios, then I'd be all for aggressive DC investing - and where this is actually the case, sure, take the gloves off. However, that is not the majority of our retirement plan participants.

Sometimes we need to be protected from ourselves - we have met the enemy and it is us.

I also can't blame lawmakers for wanting to suppress the opportunity for tax-deferred (or in a Roth situation, tax-free) penny-stock billionaires to arise.  Or in this case, something potentially as volatile such as crypto.  

I don't think they're saying that Fidelity is a fiduciary, Peter. For Fidelity its a business decision that Fidelity wanted to clear an ERISA law hurdle just to lower their own business risk. The senators are just pointing out that Fidelity doesn't need to do it, i.e. could make a business decision not to. Lots of other platforms won't do it. The senators don't want Fidelity to do it, and they're telling them that. The DOL did as much in their advice to actual plan fiduciaries.

It's government/public policy, and politics, not ERISA law. Who will look right will depend on where the invention of a missing Japanese mathematician or amateur mathematician who may or may not actually exist stands a year from now.

The closest thing to BTC (and it's not that close) is currency futures. How many plans have that as an investment option for up to 20% of your account?

CuseFan, thank you for your thoughtful outlook, especially about how our society collectively bears responsibility for those who lack resources for a minimum living.

If a fiduciary accepts a premise that some investments are so volatile that the retirement plan should not allow a directing participant to take the risk, how do we draw that line? What measures does one use? Is there a measure that screens out Bitcoin or a digital-asset account but does not screen out an emerging-markets fund (which many people consider a useful diversifier for some portion of an individual’s account)?

Bri, you’re right that lawmakers, Congress, might want to legislate so a person could not use a retirement plan to defer or prepay tax on a possibly huge investment gain. But if so, the three Senators instead ask Fidelity to substitute for Congress’s function.

Luke Bailey, I know the Senators don’t suggest that Fidelity is responsible as a plan’s fiduciary. But I don’t know how to read the effort at moral suasion without observing the authors’ unstated assumption that, if presented the choice, at least some plans’ fiduciaries would decide imprudently.

For anyone who’s wondering, I think a business, with its owners’ consent, may and should make choices, including moral choices, about what goods and services to offer.

I’m not here expressing a view, one way or the other, about Fidelity’s choice to offer its Digital Assets Account.

My response is "Hell No!" Both the primary people at EBSA and members of the HELP and Finance Committees on the Senate side, and the Ways and Means and Education and Labor Committees on the House side should be forced to sit through a four-hour course of ERISA fiduciary duty requirements before they come up with some other hare-brained scheme to cast persons who are not, and should never be, characterized as fiduciaries, into them. If they fail to get the message on the purpose of these requirements, they do not belong in a policymaking role in government at any level. Until this cryptocurrency pronouncement, EBSA (and its predecessor, the PWBA) took the position that no class of investments is per se imprudent. In designing the plan and making the decision to allow participants to invest in certain types of investment funds, the plan's fiduciaries should take into account the level of investment sophistication of the average plan participant. Perhaps they should warn them about selecting investments that are or could be extremely risky or should perhaps limit the menu of available funds for selection as part of their fiduciary duty. Or, perhaps they should disclose the need for participants to determine, on an individual basis, their own risk tolerance as well as the period of time their accounts will be invested in the plan (such as proximity to retirement age) in determining whether a particular class of assets is appropriate for them. Otherwise, casting certain types of persons as a super-fiduciary or watchdog defeats the purpose of providing investments for retirement.

3 hours ago, Peter Gulia said:

Luke Bailey, I know the Senators don’t suggest that Fidelity is responsible as a plan’s fiduciary. But I don’t know how to read the effort at moral suasion without observing the authors’ unstated assumption that, if presented the choice, at least some plans’ fiduciaries would decide imprudently.

Isn't this the same as the still unresolved issue of whether a plan sponsor has a fiduciary duty to not include a brokerage window if it concludes that some of the participants can't handle it? Some would argue that 404(c) absolves the plan sponsor from any fiduciary duty to restrict choice, as long as good choices are unrestricted, right? And I don't think it's clear they're wrong.

Some folks (I'm pretty sure a minority of knowledgeable people outside the crypto business) think crypto is a great investment. A lot of others think it's like tulip bulbs in the 17th century. There's just really nothing else like it that folks can put money into. Clearly, the senators are in the latter group.

At some point Congress will have to legislate in order to impose anti-money laundering controls and get capital gains collected on crypto transactions. Maybe they will authorize Treasury to move forward with a digital dollar as well. Maybe the senators are laying the groundwork for including in that legislation a prohibition on using crypto in retirement plans, just like there is currently a prohibition on cars, wine, and other collectibles. Just add crypto to 408(m).

2 hours ago, rocknrolls2 said:

Until this cryptocurrency pronouncement, EBSA (and its predecessor, the PWBA) took the position that no class of investments is per se imprudent.

Likely because classes of investments offered before now for useful diversifiers were not readily identifiable ponzi schemes. DoL warned this past March against crypto in retirement assets because crypto's velocity of voluminous volatility is the poster child for imprudent investing. (I call it the V3 asset class.) 

I think the senators know that the losses will be huge, as will the outcry when it happens, and are engaging in prelitigation strategy with a deep pocket which will be able to pay for those losses. In April, Fidelity requested DoL rescind its guidance on crypto, saying DoL's guidance failed to offer "meaningful substantive help for plan sponsors", that DoL overstepped its bounds by concluding plan sponsors couldn't act in the best interest of their employees while including digital assets in retirement plans.

Fidelity's self-serving and defensive position re the guidance reminds me of the "logic" espoused by a former client ,who was a meth cook, about only serving a ready market. Plan sponsors as fiduciaries are about as likely to avoid crypto as my former client's distributors because many will adopt Fidelity's posture to pass the risk on to Joe Lunchbox.

Luke Bailey, there are some similarities, but it’s at a different layer of the decision-making.

A plan’s fiduciary often faces difficult questions about whether a particular investment or kind of investment should not be available as even an investment alternative, whether designated or undesignated, because the investment’s availability might harm too many participants. While I have thoughts about how fiduciaries should resolve those questions, that’s another discussion.

The Senators’ letter puts a worry about people making poor decisions at a different layer. The Senators worry that a plan’s fiduciary, if presented an opportunity to designate Fidelity’s Digital Assets Account as an investment alternative a directing participant may choose, might make a decision the Senators fear is an imprudent decision. The Senators ask Fidelity to remove the opportunity from plans’ fiduciaries’ decision-making.

While these fears of an unwise decision have some common elements, they are qualitatively different because a directing participant harms herself, but a fiduciary’s imprudent decision might harm many participants.

If one presumes ERISA’s fiduciary law is adequate to protect participants and their beneficiaries (or just recognizes that ERISA is the public law we have), an answer is, as C.B. Zeller and rocknrolls2 say, to let the plans’ fiduciaries decide. But the Senators seem to fear that too many fiduciaries might make imprudent decisions. And they might have assumed, even subconsciously, that practically ERISA provides too little protection.

I express no view about the advantages or disadvantages of Bitcoin or other digital assets as an investment.

My question—intended to generate a discussion, which it now has—is about who decides?

It could be:

Congress, whether by making digital assets as unlawful as the unprescribed methamphetamines blguest’s former client sold, or by legislating that digital assets is not a proper investment for a retirement plan;

Fidelity or another platform provider, which could decide not to facilitate digital assets (even if what might be offered is lawful);

Each plan’s fiduciaries, who might decide that allowing participants a choice might result in more harms than benefits.

Each participant, although QDROphile suggests they should not be burdened with that responsibility.

Any of those layers might raise questions that call for complex analysis and reasoning.

Thank you, everyone, for helping me think about this. And I invite more views and observations.

Peter, I guess my final comment on this will be to take pity on our poor Federal government. (Wow, never thought I'd say that!) People have lost a lot with BTC. Maybe if they hang in, they'll get it back, I guess , agrguably, but in the meantime there are large losses. Sixty-six percent from the peak. For now, price is sticking at about $20k. Folks are already saying about this, "Where was the SEC?" (Of course they should be saying, "Where was the CFTC.") At some point, folks will say, "Where was Congress?"

Government being government. I don't think you can blame them on this one.

Without attempting to elaborate on the already fine points made by many folks already, I'll just say that I like Luke's suggestion: "just add crypto to 408(m)." Problem solved.

I think everyone in this discussion recognizes that executive agencies could use each’s rulemaking, other interpretation, and enforcement powers to regulate disclosures of, and even investments in, digital assets.

And if current law isn’t enough, Congress has plenty of Article I powers to make laws.

What some (not all) dislike is three Senators—who have votes in one of Congress’s bodies, and powers to try to persuade their fellow Members—asking a private business to act when Congress doesn’t.

About Internal Revenue Code of 1986 § 408(m), could the Treasury department or its Internal Revenue Service interpret § 408(m)(2)’s subparagraphs about “any stamp or coin” and “any other tangible personal property specified by the Secretary for purposes of this subsection” to apply to a digital asset the Federal income tax treatment § 408(m)(1) provides?

http://uscode.house.gov/view.xhtml?req=(title:26%20section:408%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section408)&f=treesort&edition=prelim&num=0&jumpTo=true

Or if that current law is not enough, Congress could add one more subparagraph with a few words to describe the digital assets not to be treated as a retirement plan’s investments.

The Senate could add it to the Inflation Reduction Act bill this week. Because the provision would score as a revenue-gainer, it could not unfavorably change a revenue target for the legislation.

23 minutes ago, Peter Gulia said:

About Internal Revenue Code of 1986 § 408(m), could the Treasury department or its Internal Revenue Service interpret § 408(m)(2)’s subparagraphs about “any stamp or coin” and “any other tangible personal property specified by the Secretary for purposes of this subsection” to apply to a digital asset the Federal income tax treatment § 408(m)(1) provides?

Peter, I think pretty much everyone who's looked at that has concluded that because Notice 2014-21 says that crypto is "property" and not an actual 'coin," and because it is intangible, it's safe to hold in, e.g., an IRA, without violating 408(m) as currently written. Cold wallet storage raises a custody issue, however, that you have to be careful in handling, e.g. by holding through an exchange rather than directly in your wallet. There is a whole business niche catering to crypto IRAs.  I have found that the best place to find info on it is  Youtube, but of course it's not all good.

30 minutes ago, Peter Gulia said:

Or if that current law is not enough, Congress could add one more subparagraph with a few words to describe the digital assets not to be treated as a retirement plan’s investments.

Could.

31 minutes ago, Peter Gulia said:

The Senate could add it to the Inflation Reduction Act bill this week. Because the provision would score as a revenue-gainer, it could not unfavorably change a revenue target for the legislation.

They might, but at least until recently there have been some powerful, bipartisan folks in the Senate who are trying to position their various localities as "crypto valley." Crypto has some good lobbyists.

Yup, the Senators ask Fidelity to do what public law doesn't do.

That recognized, I'm not saying a private business organization's owners shouldn't make their own choices about what goods and services to offer.

I've had the privilege of advising businesses, including retirement-services providers, that decided not to offer a lawful service, one that would get profits, because the owners' ethical choice was to refrain from offering a service that could result in harm.

5 hours ago, Luke Bailey said:

Peter, I think pretty much everyone who's looked at that has concluded that because Notice 2014-21 says that crypto is "property" and not an actual 'coin," and because it is intangible, it's safe to hold in, e.g., an IRA, without violating 408(m) as currently written.

IRC 408(m) should be amended to address the issue. Some proposed amended language:

(m) Investment in certain items treated as distributions
    (1) In general
    The acquisition by an individual retirement account or by an individually-directed account under a plan described in section 401(a) of any collectible or of any virtual currency shall be treated (for purposes of this section and section 402) as a distribution from such account in an amount equal to the cost to such account of such collectible or virtual currency.
    (2) Collectible defined
         ....
    (3) Exception for certain coins and bullion
        ....
    (4) Virtual currency
    For purposes of this subsection, the term "virtual currency" means a digital representation of value designed to function as a medium of exchange, a unit of account, or a store of value, or a combination thereof, for which the digital representation is not a claim to physical legal tender, but which claims intrinsic value by design.

---

Edited to add that the underlined portions are the only changes to the existing statute needed.

5 hours ago, MoJo said:

I really hesitate to call it an asset as it has no, nada, zip, zilch intrinsic value.  It is a computer record that is more of a medium for the exchange of wealth between buyers and sellers.  Standing alone, it isn't a "productive" investment.  One could argue that dollars have no intrinsic value as well - but dollars are backed by the full faith and credit of U.S. government (and we can discuss how much that is worth - but it is worth more than cryptos - which lack any backing whatsoever.)

MoJo, I really liked all of your post. Will comment only on the above. I'm pretty sure that you've put your finger on it, but let's give the crypto believers their due. I'm pretty sure that the Bitcoin maximalists have placed bets on BTC because (a) they believe that what they like to call "fiat" currencies (the biggest one being the dollar) will at some point experience runaway inflation and be worthless, e.g. as happened to the mark in Weimar Germany, and (b) BTC essentially has a high moat and will be the sole survivor. Maybe also Ethereum. But it can't be more than that, otherwise you have something akin to fiat crypto, i.e. no cap on available tokens. I think they're that far out there. Think Ayn Rand in a Mad Max world.

50 minutes ago, Luke Bailey said:

MoJo, I really liked all of your post. Will comment only on the above. I'm pretty sure that you've put your finger on it, but let's give the crypto believers their due. I'm pretty sure that the Bitcoin maximalists have placed bets on BTC because (a) they believe that what they like to call "fiat" currencies (the biggest one being the dollar) will at some point experience runaway inflation and be worthless, e.g. as happened to the mark in Weimar Germany, and (b) BTC essentially has a high moat and will be the sole survivor. Maybe also Ethereum. But it can't be more than that, otherwise you have something akin to fiat crypto, i.e. no cap on available tokens. I think they're that far out there. Think Ayn Rand in a Mad Max world.

I would agree that this may be their "motivation" but I still have issues with the model.  *IF* fiat currencies lose value and hyper inflation results, then what value are your holdings of crypto?  WHO can buy them/what goods or service providers will accept them?  Crypto is wholly dependent on the purchaser's perception of value.  Not in any real value - which means that while the theoretical price of the crypto may go up/exceed inflation, you still have to find someone to accept it, or buy it to render it into a useable currency.

I own a few rentals (small time landlord) and recently redrafted my lease to ensure rents are payable *only* in U.S. dollars.  Between the time someone pays me in BTC and the time I can spend it, it may lose (or gain) a sizeable percentage, the "wallet company may be breached, and locust may invade my space....  If the US dollar becomes worthless due to hyper inflation, bend over, kiss your a$$ goodbye, and ....  Nothing will function - and BTC won't solve that (hell, without the US dollar, utilities will shutter and you won't even be able to get to your BTC).

At least with gold, you can barter....

6 hours ago, MoJo said:

Congress' inquiry here is essential.  Not so much as to regulate fiduciaries - but to understand the fiduciary implications, and then possibly legislate a regulatory scheme that protects crypto investors - not so much from the speculative nature of the investment, but from the lack of transparency, and security surrounding the trading of crypto.

More than that, MoJo, retail and institutional investors alike need a regulatory scheme that protects them from crypto investors, who have a growing ability to destabilize markets.

19 minutes ago, MoJo said:

*IF* fiat currencies lose value and hyper inflation results, then what value are your holdings of crypto?  WHO can buy them/what goods or service providers will accept them?  Crypto is wholly dependent on the purchaser's perception of value.  Not in any real value - which means that while the theoretical price of the crypto may go up/exceed inflation, you still have to find someone to accept it, or buy it to render it into a useable currency.

Virtual currencies like crypto can never be legitimate legal tender in the way fiat currencies are because they represent no value that is other than intrinsically claimed by virtue of their existence. That makes them utterly unsuitable for retirement account holdings.

7 hours ago, MoJo said:

I see  no criteria that would allow a fiduciary to even evaluate this as a plan investment, let alone conclude that it was a "prudent" investment.

Wise words indeed.

I differ though in allowing Fidelity off the hook, because Fidelity's requesting DoL rescind its guidance is not simply a sexy move by an innovative marketer which is not a fiduciary, it is a Machiavellian ploy by a powerful firm, with which fiduciaries have a good faith relationship to handle their assets, to maximize its own short-term profit no matter the cost to others.  That position brings echos of a certain politician's claim that his "innovative" (mostly unlawful) tax avoidance schemes "makes him smart".

25 minutes ago, blguest said:

I differ though in allowing Fidelity off the hook, because Fidelity's requesting DoL rescind its guidance is not simply a sexy move by an innovative marketer which is not a fiduciary, it is a Machiavellian ploy by a powerful firm, with which fiduciaries have a good faith relationship to handle their assets, to maximize its own short-term profit no matter the cost to others.  That position brings echos of a certain politician's claim that his "innovative" (mostly unlawful) tax avoidance schemes "makes him smart".

And that is what others will use in competing against Fidelity....  ☺️

(and anyone who declares themselves to be "smart", isn't)....

4 hours ago, MoJo said:

Crypto is wholly dependent on the purchaser's perception of value. 

Ultimately, so's the dollar, Mojo, just a piece of paper. Now there is the Fed, and the IRS, and banks, etc., that add credibility to that perception, but ultimately it's a perception.

4 hours ago, MoJo said:

I would agree that this may be their "motivation" but I still have issues with the model.  *IF* fiat currencies lose value and hyper inflation results, then what value are your holdings of crypto?  WHO can buy them/what goods or service providers will accept them? 

BTC is capped at 21 million total. That's all that can be mined. I know this is hard for a normal person to comprehend, but I'm pretty sure that the answer to your question is you have to posit a society/economic situation in, say, 10 years, where no one wants to take anything for their stuff but BTC, because the only folks who have money after the dollar collapse are the bitcoiners, and none of them want to take anything else other than BTC. That's the value proposition. There can't be any other. It has to replace the dollar to have long-term value. In other words, a virtual "Galt's Gulch."

"and if I claim to be a wise man, well, it surely means that I don't know" - Kansas. Showing my age here...

12 hours ago, Luke Bailey said:

Ultimately, so's the dollar, Mojo, just a piece of paper. Now there is the Fed, and the IRS, and banks, etc., that add credibility to that perception, but ultimately it's a perception.

 

BTC is capped at 21 million total. That's all that can be mined. I know this is hard for a normal person to comprehend, but I'm pretty sure that the answer to your question is you have to posit a society/economic situation in, say, 10 years, where no one wants to take anything for their stuff but BTC, because the only folks who have money after the dollar collapse are the bitcoiners, and none of them want to take anything else other than BTC. That's the value proposition. There can't be any other. It has to replace the dollar to have long-term value. In other words, a virtual "Galt's Gulch."

The fallacy in the scenario you posit is that when the dollar becomes worthless, you assume that society still functions - with functioning infrastructure.  If the dollar truly becomes worthless, who's going to keep the lights on?  How are people going to access their crypto wallets - all of which requires a functioning society.  People can indeed live without electricity - and can indeed engage in limited commerce without electricity (using "hard assets and barter) but by definition, crypto requires electricity and an internet - and in the Mad Max scenario, while there may be some with some access, the majority will in fact lose that access - and that is the "bend over and kiss ..." scenario.

And yes - the dollar's value is perception based, but the "full faith and credit" scenario create a guaranteed perception of value.  The only situation in which that value goes to zero is the complete breakdown of government, which is the complete breakdown of commerce beyond that which is local.  Placing faith in BTC to be your savior in that scenario is basically laughable.

In the mid-1970s, a friend (now 90) bought New York City bonds when the city was plainly insolvent, and had big operating deficits and huge debts. Many of his friends questioned the risks he took. His response: “If we can imagine a world in which the City of New York does not pay on its obligations, the concept of money will have ceased to have any meaning.”

Perhaps I should know this, but I don't. Suppose such a bond reached its maturity date in 2020. Suppose in 2020 the municipality is insolvent, and can't pay. Now fast-forward to 2022. Now the municipality is solvent again. Do bonds maturing in 2022 get full payment, and 2020 bondholders are out of luck or only receive a portion of what is due? Or do the 2020 bondholders have claims that get paid first? Etc., etc.? Maybe there are no consistent "rules" on this anyway? 

Just curious. One of the few virtues of not having a lot of investments is that you don't have to worry about it...

8 minutes ago, Belgarath said:

Perhaps I should know this, but I don't. Suppose such a bond reached its maturity date in 2020. Suppose in 2020 the municipality is insolvent, and can't pay. Now fast-forward to 2022. Now the municipality is solvent again. Do bonds maturing in 2022 get full payment, and 2020 bondholders are out of luck or only receive a portion of what is due? Or do the 2020 bondholders have claims that get paid first? Etc., etc.? Maybe there are no consistent "rules" on this anyway? 

Just curious. One of the few virtues of not having a lot of investments is that you don't have to worry about it...

I think the obligation to pay remains, unless discharges in bankruptcy (and there are specific sections of the bankruptcy code for municipal bankruptcy - which is well beyond my area of comprehension, let alone expertise!)

25 minutes ago, Peter Gulia said:

In the mid-1970s, a friend (now 90) bought New York City bonds when the city was plainly insolvent, and had big operating deficits and huge debts. Many of his friends questioned the risks he took. His response: “If we can imagine a world in which the City of New York does not pay on its obligations, the concept of money will have ceased to have any meaning.”

Exactly!

4 hours ago, Belgarath said:

"and if I claim to be a wise man, well, it surely means that I don't know" - Kansas. Showing my age here...

They stole that from Socrates.

43 minutes ago, MoJo said:

I think the obligation to pay remains, unless discharges in bankruptcy (and there are specific sections of the bankruptcy code for municipal bankruptcy - which is well beyond my area of comprehension, let alone expertise!)

I agree with Mojo. Would have to have a municipal bankruptcy in a state that permits application of the federal bankruptcy code (not all do) and there would be negotiations. If you're really interested you might want to review all that happened in Detroit a decade ago. I believe some of the cases are still ongoing.

On 8/3/2022 at 3:53 PM, MoJo said:

Very interesting topic and comments - but I think the discussion is somewhat off the real issue here.  The fundamental problem is "what is Bitcoin and other cryptos?"  I really hesitate to call it an asset as it has no, nada, zip, zilch intrinsic value.  It is a computer record that is more of a medium for the exchange of wealth between buyers and sellers.  Standing alone, it isn't a "productive" investment.  One could argue that dollars have no intrinsic value as well - but dollars are backed by the full faith and credit of U.S. government (and we can discuss how much that is worth - but it is worth more than cryptos - which lack any backing whatsoever.)

Add to that, it is an unregulated investment, unlike other investments (even scarily volatile/risky and other "V3" types of investments commonly called derivatives, or some options, commodities and the like).  EVERYTHING ELSE that is an "investment" is regulated by some entity - in order to ensure minimally sufficient information is available for investors to make informed choices, and to ensure the integrity of the platforms on which the investments are traded.  NO SO FOR CRYPTO.

The fundamental problem here, is that people are arguing that a "prudent fiduciary" should be able to evaluate an unlimited universe of potential options (and select some of them prudently, of course), and that in order for some to speculate (and there is no other word for an investment in crypto) on something unregulated, without intrinsic value, and not productive (in the sense that it's value is pegged to its ability make money through some business operation) to allow something for which there is no information on how the thing is priced, traded, secured, or even subject to the jurisdiction of U.S. Courts (an ERISA requirement).  I see  no criteria that would allow a fiduciary to even evaluate this as a plan investment, let alone conclude that it was a "prudent" investment.  Past performance is not indicative of future performance" is applicable here.  It went up!  It must be good.  It also went down - and no one knows why it goes up and down....  No way to evaluate trader sentiment which seems to be the only driver of it's price.

If people want to participate in the frenzy that is crypto - well, do it outside the plan where prudence considerations are personal, and not plan wide, or invest through an ETF that invests in crypto and crypto related assets (which are regulated and recognized as investments), or invest in companies that develop, promote or provide platforms for the trading of crypto.

That said, the underlying technology of blockchain is a technology that has intrinsic value as it's uses are vastly more varied (and important) than just providing a foundation for cryptocurrencies.  THAT may be worth investing in - and may be a prudent choice.

Keep in mind that Fidelity is fundamentally a marketing company.  They jumped on the bandwagon by developing a product to allow for trading in crypto on their DC plan platform.  They got press.  They are entitled to build their platform as they see fit - without fiduciary ramifications - just as my employer (whom I refer to as a "non-discretionary directed ministerial service provider" (aka not a fiduciary...) can build it's platform as it sees fit (without - for now - crypto - or even allowing for cannabis companies as clients (again, for now).  I expect that Fidelity will get only a handful of niche clients who opt for crypto in their plan.  Nonetheless, they got press for being an innovative company - forward thinking.  And that is probably their ultimate goal/win by doing this.

Congress' inquiry here is essential.  Not so much as to regulate fiduciaries - but to understand the fiduciary implications, and then possibly legislate a regulatory scheme that protects crypto investors - not so much from the speculative nature of the investment, but from the lack of transparency, and security surrounding the trading of crypto. But if you are looking for a secure way to conduct transactions, then I still advise you to initially familiarize yourself with the best crypto payment processors. You can choose the one that suits you best and conduct your transactions quickly and safely.

 Unlike traditional assets, cryptocurrencies lack intrinsic value and are not backed by any government or physical commodity, making them fundamentally different from fiat currencies, which are backed by the full faith and credit of governments.

Moreover, the unregulated nature of cryptocurrencies presents significant challenges. Traditional investments are subject to regulatory oversight to ensure transparency and protect investors, while cryptocurrencies operate in a largely unregulated space, making them more susceptible to volatility and fraud.

The prudence of investing in cryptocurrencies within retirement plans is questionable. ERISA requires fiduciaries to act with prudence and solely in the interest of plan participants. Given the speculative nature of cryptocurrencies and the difficulty in evaluating their value and security, it is challenging for fiduciaries to justify including them in retirement plans.

AI has a tough time saying anything meaningful about pension topics, as evidenced by the prior post.