How Blockchain Can Change 401(k)s


block chainthe technology behind CRYPTOCURRENCIES Like bitcoin, it could actually change the way we manage 401(k)s. Experts claim that blockchain represents the greatest advance since the Internet, with the potential to improve almost everything in our lives, including our health and bank balance. This is how the amount of money we have to live on in retirement could also increase.

key takeaways

  • Having everything stored in one easily accessible 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 customers and generate better returns.
  • Blockchain does not require an external intermediary to validate transactions, resulting in faster response 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 power consumption, relative lack of speed, and the fact that each block in the chain can only hold a limited amount of data.

What is the blockchain?

Unless you have been living on another planet for the last decade, you have probably heard of blockchain. It is a digital ledger that records everything that needs to be recorded and verified securely and simultaneously over a network of computers. Every time something new happens, a record is automatically added to this type of online Excel document. And that registry is secure, cannot be tampered with, and is theoretically accessible to everyone.

In short, this technology offers a potentially more secure, reliable, efficient, and organized way of recording data than what we currently have. While that may not seem particularly special, it’s actually a big deal.

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

One thing that could really be saved by a technological breakthrough is the US retirement system. Increasing life expectancy, mismanagement, low mobility, lack of trust, too many stakeholders, and limited transparency are just some of the problems that threaten to leave a significant part of the population without the resources to live comfortably when they get old and go. the workforce.

Blockchain, if it lives up to its potential, could help reduce these headwinds and bring retirement savings back to life. Here’s a list of some of the key ways this much-hyped technology could make one of the darkest clouds hanging over the economy go away.

More transparency

Faith in the financial institutions that administer retirement plans is not exactly high, and part of that is due to a lack of transparency. Inconsistent information, hidden fees and jargon deter many people from bothering to save for retirement.

A shared decentralized ledger could perhaps help remedy this problem. Having everything stored in one easily accessible 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 quite frequently. In some cases, when they leave a job, they also leave behind an old pension.

In the US, it is basically up to the employees to control all of their 401(k)s from previous jobs or merge them with your new employer’s plans. There is no pension database that keeps track of the total defined contribution of workers or someone who is in charge of moving retirement savings to where the employee goes.

Unfortunately, this means that it’s quite common for people to lose track of where all their retirement accounts are and lose some of the money they worked hard to save for their later years. In 2017, NBC News reported that American workers could be missing out on a collective $2 trillion in retirement savings simply by not roll over their 401(k) savings accounts when they change jobs. In 2021, financial services company Capitalize said there were 24.3 million forgotten 401(k) accounts worth about 20% of all 401(k) assets in the US.

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 easily accessible place.

24.3 million

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

Eliminate the middlemen

One of the most hyped things about blockchain is that it does not require an external intermediary, such as banks and clearing houses to validate transactions. When money or something else changes hands, it is instantly recorded on multiple computers that are, in theory, accessible for all to see.

The importance of this is enormous. Cutting out the middleman should lead to faster results and lower costs. With fewer people taking a share, more of your money is invested, resulting in a larger pension.

Keep providers on their toes

Arguably, having all your retirement savings-related information stored in one easily accessible place should put pressure on financial institutions to work harder to retain customers. A common problem today is that owners rarely monitor retirement plans. If blockchain delivers on its promise and changes this, asset managers will no longer be able to take customers for granted. When the threat of them searching, abandoning ship and demanding more becomes a reality, suppliers will theoretically be forced to offer more competitive terms, which is expected to result in lower costs and higher quality products.

less hackable

In recent years there has been an increase in the number of 401(k)s that have been hacked. Most attacks lead to the theft of personal information, although online criminals are also taking more and more money from people’s schemes.

Blockchain could help put an end to this. Blockchain network information is held 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.

Obstacles still to be overcome

The benefits of blockchain have been touted for several years, but the technology has yet to be widely adopted. Why is that? As we have seen with other great advances in the past, it takes time for a potentially groundbreaking invention to transform into a flawless system that can be used safely and efficiently by the masses.

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

Some of the biggest issues that need to be resolved before blockchain can become scalable for widespread use include the amount of power it consumes to run, its relative lack of speed, and the fact that each block in the chain can only hold a limited amount of data.

Another concern is that merging 401(k)s with blockchain could make crypto a permanent fixture in retirement plans. the US Department of Laborthe agency charged with making sure that employer retirement accounts meet minimum standards set by the Employee Retirement Income Security Act (ERISA)has made it quite clear that he is against this idea, because of the speculative and the volatile nature of these digital currencies.

When could Blockchain become mainstream?

Despite all the hype, blockchain still has a long way to go before it becomes the primary system in which all of our transactions and records are recorded. In 2019, Gartner said that five to 10 years could be enough for blockchain to win over doubters, eradicate its flaws, and be entrusted with such important tasks. Still, that’s just an estimate, and things can turn out very differently.

Can my 401(k) invest in cryptocurrencies?

A handful of 401(k) fiduciaries are beginning to allow investors to invest a portion of their retirement savings in cryptocurrency, despite some resistance from the U.S. Department of Labor. Employers are generally in a difficult situation. A Pew Research Center survey conducted in September 2021 showed that approximately 31% of young Americans, ages 18-29, have invested, traded or used a cryptocurrency, nearly double the rate of participation of Americans in general. Companies must decide whether to recognize this interest and allow cryptocurrency investments in 401(k)s knowing that it could lead to people’s retirement money disappearing and a series of lawsuits.

Does Fidelity offer cryptocurrency for 401(k)?

Yes. Fidelity recently said it would give employees the opportunity to invest up to 20% of their 401(k) in bitcoin, if allowed by their employers.

The bottom line

Blockchain has the potential to greatly improve the standard of living of the retired part of the population. Greater transparency and efficiency should drive engagement, reduce costs, and ensure that the money we set aside each month is used in the best way and has the greatest opportunity to grow in value.

The bad news is that exciting prospect could take a while to become a reality. As it is, blockchain still has many hurdles to overcome before it is ready for the mainstream. There is also the possibility that it may never make it that far and be replaced by something else, still unknown, that is even more capable.