Fidelity’s Controversial Bet on Bitcoin - The Journal. - WSJ Podcasts

Fidelity’s Controversial Bet on Bitcoin – The Journal. – WSJ Podcasts

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

Kate Linebaugh: If the retirement industry was a car, what kind of car would it be?

Anne Tergesen : Oh, goodness. Okay. It would be something kind of built for maximum safety, maybe a Volvo. It’s not too racey, it doesn’t go from 0 to 100 in 2 seconds. It takes its time but it does the job. And it’s kind of built to last.

Kate Linebaugh: Our colleague Anne Tergesen covers retirement. And for a long time, she says one major company, a tried and true engine in a steady industry has led the pack: Fidelity.

Anne Tergesen : Their reputation was always for pretty high quality. They were sort of this behemoth in the industry and they offered like a pretty wide range of things. Nothing too crazy.

Kate Linebaugh: But recently the company decided to tinker under the hood.

Anne Tergesen : I mean, thinking back on all the years I’ve been covering this, it’s always been stocks, bonds, or some form of cash. And then along comes cryptocurrency, which kind of shakes things up.

Kate Linebaugh: And if crypto were a car, what would it?

Anne Tergesen : Oh my goodness. Well, I think that would be sort of the, on the more kind of muscle car/race car end of things.

Kate Linebaugh: So like a Lamborghini?

Anne Tergesen : Yeah, that sounds, yeah. I could picture that

Kate Linebaugh: Fidelity decided it would let its 401k investors soup up their portfolios by letting them buy Bitcoin.

Anne Tergesen : Now with cryptocurrency on the horizon and gaining a place in the 401k menu of a very large plan provider, it feels like all of a sudden, this is potentially a very big change.

Kate Linebaugh: Welcome to The Journal, our show about money, business and power. I’m Kate Linebaugh. It’s Thursday, May 12th. Coming up on the show, Fidelity’s bid to bring crypto to retirement and the blow-back that followed.
Fidelity was founded in the 1940s in Boston, and has been run by one family ever since: the Johnsons. They’ve grown the company into the biggest player in the 401k industry, managing trillions in assets.

Anne Tergesen : They were pretty, kind of stayed company. They would develop new products. They tried to keep up with consumer demand, but they pretty much stuck to their knitting, in terms of their forte was to offer stock and bond mutual funds. And that’s what they did.

Kate Linebaugh: But a few years ago, that culture started to shift a little and it coincided with a change at the top when Abigail Johnson, the granddaughter of the company’s founder took over as CEO in 2014.

Anne Tergesen : Abby Johnson has stuck to a lot of the same strategies that made the company preeminent, but she’s also taken the company in some surprising new directions. We also saw Abby Johnson start to think about cryptocurrency in a way that a lot of other big companies of Fidelity’s size have not. And when she took over, I think she really had a focus on giving this new generation of investors what they’re looking for and cryptocurrency was part of that.
So in 2013, Abby Johnson began to hold Wednesday evening meetings with executives at the company to discuss crypto and blockchain technology. 2 years later in 2015, Fidelity started to mine Bitcoin as a research project. So this was sort of like behind the scenes, kind of small forays.

Kate Linebaugh: And Johnson’s interest in crypto continued to grow. In 2017, she declared herself a believer in Bitcoin. A year later, Fidelity launched its first venture into the crypto markets.

Anne Tergesen : The company took a pretty big step where it launched a business that trades and stores Bitcoin for sophisticated investors like hedge funds. And I can’t think of another company of Fidelity’s size that’s done something comparable.

Kate Linebaugh: And Johnson often spoke out about the value of digital assets, and Bitcoin in particular. Here she is at a baron’s event a couple years ago.

Abigail Johnson: In terms of bringing the world along (inaudible) on digital currencies in general, what we are really, from a commercial perspective, putting our efforts around is trying to connect the legacy world with the future of digital currency.

Kate Linebaugh: And what did all this sort of say to you as you’re watching Fidelity dabble in crypto?

Anne Tergesen : Yeah, I think they’re trying hard to meet consumer demands, and they’re trying to be innovative, and they’re trying to embrace new technology and new ideas about investing.

Kate Linebaugh: While Fidelity was out there talking about crypto, another smaller player got a jump on them. A company called ForUsAll.

Anne Tergesen : It’s a small, really tiny little company on the West Coast in California. They specialize in helping small companies that don’t have 401ks get set up. And about a year ago, that company grabbed headlines by announcing that it would offer cryptocurrency as part of its 401k menu. And that really sent shockwaves through the retirement industry and also through the regulatory community.

Kate Linebaugh: And what are the pros and cons of having crypto in people’s 401k accounts?

Anne Tergesen : Well, so the people who are in favor of crypto and retirement portfolios feel that it’s a transformative industry and technology, and that by getting in today, it will help Americans build wealth over time.

Kate Linebaugh: And what are the cons?

Anne Tergesen : The cons of it, well, I think a lot of people are uncomfortable with it because they feel like it’s a fairly new technology, it’s a fairly new asset class, and it’s largely unproven. It’s incredibly volatile. You have to have the temperament to withstand these huge swings. And of course it’s wonderful when it’s up, but when it’s down, you have to be willing to stick with it.

Kate Linebaugh: After ForUsAll said it would allow crypto and its 401k plans, the Department of Labor, which regulates those plans took notice.

Anne Tergesen : In the middle of March, the Labor Department issued an opinion on the topic of cryptocurrency and 401ks. But the Labor Department essentially said we think that cryptocurrency is quite volatile and speculative, and it’s not ready to be in 401k plans. And it’s up to employers to decide whether they want to offer it or not. But if you, as an employer are going to offer this to your employees in your 401k plan, expect to be investigated by the Labor Department, expects us to show up at your doorstep and ask a lot of questions.

Kate Linebaugh: Despite that warning from the Labor Department, last month, Fidelity jumped in.

Speaker 4: Oh, if you’re into Bitcoin, Fidelity now has your back.

Speaker 5: Like much of the conversation around Bitcoin, this is controversial.

Kate Linebaugh: That’s after the break.
Last month, after years of exploring crypto, Fidelity said it would add Bitcoin as an option for its retirement plans.

Anne Tergesen : They were announcing that they were going to allow the 23,000 companies that use Fidelity as a 401k record keeper to add cryptocurrency to their 401k menus if they chose to do so. They’re allowing companies to give people guardrails of up to 20% in crypto. Although they’re also allowing companies to adopt a lower cap.

Kate Linebaugh: Why did Fidelity say it was making this move?

Anne Tergesen : Well, Fidelity has said that it’s offering cryptocurrency because it expects that cryptocurrency’s going to shape the way future generations think about investing. So in other words, they expect that cryptocurrency’s here to stay, that it’s going to be sort of a transformative technology, and that it’s something that investors should have in their long term retirement portfolios.

Kate Linebaugh: That opinion was not shared by the regulator. An official from the Department of Labor, Ali Khawar, told Anne that he only learned about Fidelity’s plan the day before the announcement. And he also said he has “grave concerns” because he views crypto as speculative. Here he is speaking to Yahoo News.

Ali Khawar: The concern that we have comes from not really a question of whether people are buying or are interested in buying Bitcoin. But the fact that these are assets that people are supposed to be saving for their old age. And it really is that fact that is, I think, critical to keep in mind.

Kate Linebaugh: And it wasn’t just regulators who were troubled. Some lawmakers were too.

Anne Tergesen : Senator Elizabeth Warren from Massachusetts and Senator Tina Smith from Minnesota, both weighed in on Fidelity’s plans. And they expressed similar concerns to what the Labor Department had said. They expressed concerns about the volatility of cryptocurrency and they expressed some concerns that Fidelity has potential conflicts of interest according to them, that would cause them to offer cryptocurrency or to push it in 401ks.

Kate Linebaugh: The senators pointed to Fidelity’s past crypto mining and its crypto fund for wealthy investors. They also focused on the volatility of cryptocurrency. Bitcoin, the best known and most established digital currency has lost more than 50% of its value since November. And Warren in particular has been pretty critical of crypto.

Anne Tergesen : She’s expressed a lot of concerns about its volatility and risk level. She recently compared buying crypto to buying air.

Speaker 7: If I buy Bitcoin, am I buying a share of stock? Or am I buying a pork belly? Or am I buying euros?

Elizabeth Warren: Or are you buying air?

Speaker 7: Oh, wow. Okay. You’re going in? What is it?

Elizabeth Warren: I’m going in? Because that’s the point is that you’re buying something that other people believe either is going to go up in value. Presumably, that’s why you’re buying it. Or think it’s going to go down in value, which is presumably why someone else is selling it.

Anne Tergesen : As in there may be no value there, I think is what she was trying to say.

Kate Linebaugh: Fidelity says it has put in place constraints that will help protect investors. For example, it’s capping transfers to Bitcoin at 20% of account balances. And employers don’t have to sign up for the crypto option. Anne says for Fidelity, this crypto move may be the culmination of years of research, but it’s also a bit of FOMO: the fear of missing out.

Anne Tergesen : I think they view the risk more as being one that if they don’t offer people the opportunity to do this, they’re going to be missing out on huge potential gains, especially if they offer them the opportunity to do it so early in the evolution of that industry. I think they also are concerned that people who are gung-ho on Bitcoin, especially younger workers, really want this in their 401k. And if they don’t have access to it in their 401k, maybe they’re just not going to contribute to the 401k at all. And instead, they’re just going to take the money that they have available to save. And they’re going to just invest all of their money in Bitcoin, which could be much more problematic.

Kate Linebaugh: So is this like putting a Lamborghini engine inside a Volvo?

Anne Tergesen : Well, I think from Fidelity’s point of view, maybe it’s sort of like amping up a piece of that engine. And that’s the goal.

Kate Linebaugh: Adding a cylinder.

Anne Tergesen : Exactly. Adding a cylinder. And I think that’s the goal, that most people who believe that cryptocurrency belongs in your long term portfolio are looking for something on the order of a pretty small investment. But that it’s small, but because it has the potential for outsized gains that it might really enable you to realize more wealth over time.

Kate Linebaugh: That’s all for today, Thursday, May 12th. The Journal is a co-production of Gimlet and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We’re out every weekday afternoon. Thanks for listening. See you tomorrow.

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