Blockchain may be the most overused and least understood word in the financial world today. In 2018, 95% of companies across different industries were investing in blockchain tech projects.
Most people associate blockchain with cryptocurrencies, such as bitcoin, without really understanding what blockchain actually means and what impact it may have on all of our lives in the not-so-distant future.
Blockchain is a lot more than just a digital and secure ledger for cryptocurrencies. Blockchain has the power to transform the way businesses operate, produce efficiencies in the U.S. and global financial systems, and even help Americans gain greater confidence in the retirement system.
In simple terms, a blockchain is an online ledger that contains any and all transactions that occur there. It’s generally referred to as “decentralized” since it’s not backed by one central, governing body. Instead, anyone can access the blockchain to check the authenticity of a transaction. Further, since blockchain relies on cryptography, there’s no way to amend a transaction once it’s part of the ledger. In other words, blockchain can be thought of as an advanced Excel data sheet that is decentralized, accurate and secure.
Blockchain, popularly introduced as part of bitcoin in 2008, is based on the concept of distributed ledger technology for transactions to be stored globally as blocks. The growth of the cryptocurrency industry has also helped accelerate the notion that blockchain technology will be an important part of future technology for many industries and governments.
The application of blockchain technology is potentially wide and diverse. For example purposes, it is helpful and more constructive to examine its potential impact on one specific industry. Because of my background as a tax lawyer and author of seven self-directed retirement books, I will examine the potential impact blockchain can have on the U.S. retirement system.
When it comes to locating or moving funds from a former employer pension plan, you are pretty much on your own. The United States does not have a national database that keeps track of workers’ 401(k) plans or pension accounts. In addition, there is no unified system by which American workers can automatically roll over their 401(k) or pension account into their new employer’s plan when they change jobs. As a result, very often their retirement account gets left behind, and the worker loses track of the account and the funds in it. According to a 2017 NBC News report, $2 trillion in 401(k) funds could be lost when Americans change jobs.
Currently, a number of employers are sending out 401(k) and other defined contribution accounts held by former employees that have balances of less than $5,000 to an IRA, known as a “safe harbor” IRA. The problem is that many of these account holders are never identified. A 2014 Government Accountability Office (GAO) study found it would only take nine years for a $1,000 401(k) balance to become zero.
Imagine if a solution existed that kept track of all of our retirement accounts, including former employer 401(k) defined contribution accounts and even IRAs, that was secure, transparent and easy to access. No longer would Americans lose track of where all their retirement accounts were being held. American workers would have a clearer picture of all their retirement assets and would likely be able to make wiser saving and investment decisions. In addition, individuals over the required minimum distribution (RMD) age would have an easier time determining the RMD amount due for the year in question, based on the aggregate value of all their 401(k) plans and IRAs. The good news is that the technology already exists that can solve this problem, and I believe it is based on blockchain.
The implementation of a blockchain platform, either public or private, for retirement account holders could have a direct impact on increasing the savings rate among American workers. Take the example of healthcare records. In the not so distant future, everything we have in our health records could get placed on a blockchain, and then each individual would have the power to access and manage their own records. They could simply provide a doctor with a “token” to access these records.
I think that blockchain can do the same for retirement savings. All of our retirement account data could be placed on a secure blockchain, which could be accessed and managed by the retirement account holder. A token could then be provided to a bank or financial institution in order to cause a 401(k) plan rollover or IRA transfer.
Currently, there are some issues that make utilizing this technique challenging. The biggest hurdle facing mainstream application in the retirement industry is the need for full adoption by all participants. For example, a blockchain that captures IRA rollover data would not have any value if the top three banks or financial institutions were not a part of the blockchain. This would render it incomplete and ineffective. Further, modernizing retirement account data for IRS purposes would require the IRS (and possibly other governmental organizations) to mandate all retirement account custodians and administrators to participate on the blockchain. As with any change, it’s going to be an arduous task to get everyone on board. However, the fact that this could benefit all Americans speaks for itself.
The exact way that blockchain technology will work in the retirement industry is still being formulated and is not yet clear. However, the positive impact that blockchain technology could have on the way Americans save for retirement is as clear as a block of ice.