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Read
https://www.investopedia.com/terms/1/401kplan.aspIt's like you work under someone, then your boss didn't give all amount of your monthly salary, but some part are automatically invested. But, you're the one who choose which assets that you want to invest.
Do not forget that they also want tax, and do not forget that they will always want to get them KYCed as well.
For sure the government will know everything of your cryptocurrencies.
I treat people who invest in Bitcoin through 401k is similar to buy Bitcoin ETFs, both need to trust the company who custody it and the government.
It is now better, as you explained it here, for the understanding of other members here. If the government decided to do it this way for workers, it would be nice with the consent of the workers, they can be able to invest in bitcoin and other crypto of their choice, since it is now clear that the government is the one making the arrangement for them through an approved agency or organisation. I hope the percentage to be invested would be disclosed to the workers for their knowledge before such is done.
As for the kyc, the government definitely would have it done, as they would want to get every dime they want from the process, so they take whatever information is deemed necessary for them to get that which would benefit them in the long-run.