How Blockchain Can Change 401(k)s


Blockchain, the technology behind cryptocurrencies like Bitcoin, could actually change the way we deal with 401(k)s. Experts claim that blockchain represents the biggest breakthrough since the internet, with the potential to improve almost everything in our lives, including our health and bank accounts. So it could also increase the amount of money we have to live on in retirement.

The central theses

  • Storing everything in one easily accessible place would give people a clearer picture of their retirement savings and perhaps encourage them to invest more.
  • More activity and interest should pressure financial institutions to work harder to retain customers and lead to better returns.
  • Blockchain does not require a third-party intermediary to validate transactions, resulting in faster processing times and potentially lower costs.
  • The technology is more difficult to hack thanks to its decentralized structure.
  • Issues to overcome include power consumption, relative lack of speed, and the fact that each block in the chain can only contain so much data.

What is blockchain?

Unless you’ve lived on another planet for the past decade, you’ve probably heard of blockchain. It is a digital ledger that records everything that needs to be logged and verified as it took 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 this record is secure, cannot be tampered with and is theoretically accessible to anyone.

In short, this technology offers a much more secure, trusted, efficient and organized way of recording data than we currently have. That might not sound particularly special, but it’s actually a pretty big deal.

What impact can blockchain have on 401(k)s?

One thing that could really use a technological breakthrough is the US pension system. Increasing life expectancy, mismanagement, low mobility, lack of trust, too many interest groups and limited transparency are just some of the problems that threaten to leave a significant part of the population in old age without the resources to live comfortably in the labor force.

Blockchain, if realized to its potential, could help ease these headwinds and breathe life back into retirement savings. Below, we list some of the top ways this highly hyped technology could clear one of the darkest clouds hanging over the economy.

more transparency

Confidence in the financial institutions that administer pension plans is not on the rise, due in part to a lack of transparency. Conflicting information, hidden allegations, and use of jargon keep many people from saving for retirement.

A common decentralized ledger could perhaps help. Keeping everything in one easy-to-access place would give Americans a clearer picture of their retirement savings and perhaps encourage them to invest more. A more informed population would also be more likely to make wiser investment decisions and not just choose the default option.

No more lost funds

Nowadays, people tend to change jobs quite frequently. In some cases, they also leave an old pension behind when they leave the job.

In the US, it is generally up to employees to keep track of all their 401(k)s from previous jobs or to merge them with their new employer’s plans. There is no pension database that keeps track of total defined contributions by workers, or someone to see that pension savings are transferred to where the worker goes.

Unfortunately, this means people often lose track of where all their retirement accounts are held and lose some of the money they worked hard to set aside for their later years. In 2017, NBC News reported that American workers could lose a collective $2 trillion in retirement savings simply by not renewing their 401(k) savings accounts when they change jobs. In 2021, financial services company Capitalize announced that there were 24.3 million forgotten 401(k) accounts in the US, worth about 20% of all 401(k) assets

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

24.3 million

The number of 401(k)s that Capitalize estimates have been missed.

Cut out the middlemen

One of the most hyped things about the blockchain is that it doesn’t require third-party intermediaries like banks and clearinghouses to validate transactions. When money or anything else changes hands, it’s immediately logged on multiple computers, theoretically visible to all.

The importance of this is enormous. Eliminating middlemen should result in faster results and lower costs. With fewer people making a cut, more of your money is invested, resulting in a larger retirement pot.

Keep vendors on their toes

Having all of your retirement savings information in one easy-to-access place should arguably put pressure on financial institutions to work harder to retain customers. A common problem today is that pension plans are rarely overseen by their owners. Should the blockchain live up to its promise and change that, wealth managers will no longer be able to take clients for granted. In theory, if the threat of them poke around, jump ship and charge more becomes a reality, vendors will be forced to offer more competitive terms, hopefully resulting in lower costs and higher quality products.

Less hackable

In recent years, the number of hacked 401(k) attacks has increased significantly. Most attacks result in the theft of personal information, although online criminals are increasingly taking money out of people’s schemes.

Blockchain could help put an end to this. Information on the blockchain network resides in a shared database that resides on millions of computers rather than in a central location. According to experts in the field, this decentralized structure makes hacking more difficult.

Obstacles still to be overcome

The benefits of blockchain have been touted for a number of years, but the technology is not yet widely adopted. Why is that? As we’ve seen with other major breakthroughs in the past, it takes time to transform a potentially groundbreaking invention into a bug-free system that can be used safely and efficiently by the masses.

In 2017, research firm Gartner predicted that blockchain was 10 years away from becoming mainstream. It said five to ten years in 2019, suggesting 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 addressed before blockchain can scale for widespread deployment are the amount of power it consumes to function, its relative lack of speed, and the fact that each block on the chain is only can hold a limited amount of data.

Another concern is that uniting 401(k)s with blockchain could result in cryptocurrencies becoming a staple of retirement plans. The U.S. Department of Labor, which is responsible for ensuring that employers’ retirement accounts meet the minimum standards set by the Employee Retirement Income Security Act (ERISA), has made it pretty clear that it is against this idea due to the speculation and volatility inherent in these digital currencies .

When could blockchain become mainstream?

Despite all the hype, the blockchain still has some work to do before it might become the primary system that logs all of our transactions and records. In 2019, Gartner said that five to 10 years might be enough for blockchain to convince skeptics to iron out its shortcomings and be entrusted with such important tasks. But that’s just an estimate, and it may turn out very differently.

Can My 401(k) invest in cryptocurrencies?

A handful of trustees of the 401(k) plan are beginning to allow investors to invest some of their retirement savings in cryptocurrencies, despite some opposition from the U.S. Department of Labor. Employers are usually in a difficult position. A September 2021 Pew Research Center poll showed that about 31% of young Americans ages 18-29 have invested in, traded in, or used cryptocurrency, almost twice as many as Americans overall. Businesses must decide whether to acknowledge this interest and allow crypto investments in 401(k)s, knowing that doing so could result in people’s retirement funds going up in smoke and a series of lawsuits ensuing.

Does Fidelity offer crypto for 401(k)?

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

The final result

Blockchain has the potential to significantly improve the standard of living of the retired part of the population. Greater transparency and efficiency should increase engagement, reduce costs and ensure that the money we set aside each month is being used optimally and given the greatest opportunity for value creation.

The bad news is that it might be a while before this exciting prospect becomes a reality. From today’s perspective, blockchain still has many hurdles to overcome before it becomes ready for the mainstream. There is also a chance that it will never get there and be superseded by something else, still unknown, that is even more powerful.


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