DOL sends strong warning to 401(k) plan fiduciaries about cryptocurrency 

Coins in a jar
March 16, 2022

Section 401(k) plan fiduciaries should “exercise extreme care” when considering cryptocurrency as a potential investment option for participants, the Department of Labor (DOL) cautions in Compliance Assistance Release No. 2022-01. Although the guidance stops short of saying cryptocurrency is inherently imprudent, DOL says it has “serious concerns” about the prudence of a fiduciary’s decision to “expose” participants to these assets, whether as a direct investment option or through brokerage windows. The guidance also says DOL intends to investigate plans with cryptocurrency offerings to determine whether fiduciaries complied with their ERISA duties of prudence and loyalty when making the investments available. Although the guidance discusses cryptocurrency in 401(k) plans, fiduciaries of all defined contribution (DC) plans should take note.

Concerns about crypto

The guidance defines cryptocurrency broadly to encompass a wide range of digital assets, including digital tokens and coins. DOL believes cryptocurrency investments present “significant risks and challenges” to participants for the following reasons:

  • Due to its early stage of development, cryptocurrency is highly speculative and extremely volatile, which could have a “devastating” effect on participants’ retirement savings.
  • Participants are unlikely to have the technical expertise to make informed decisions about cryptocurrency and may not be able to “separate the facts from the hype.”
  • Unlike traditional plan assets, cryptocurrency can’t be held in trusts or custodial accounts, making it vulnerable to hackers and theft.
  • Valuations are likely to be unreliable, as some experts believe the current valuation models for cryptocurrency are unsound.
  • Regulation of cryptocurrency markets is evolving, creating the potential for fiduciaries that select cryptocurrency investments to participate in unlawful transactions.

DOL’s guidance offers no viewpoint on cryptocurrency investments by defined benefit plans.

DOL to investigate plans offering crypto

The number of plans that currently offer cryptocurrency products — either as designated investment alternatives or through brokerage windows — is uncertain. However, DOL decided to issue the guidance after becoming aware of firms marketing cryptocurrency to plans as a potential investment option.

DOL expects to investigate plans that offer cryptocurrency (although it’s unclear how DOL would identify these plans). Fiduciaries of plans offering cryptocurrency as a direct investment option or through brokerage windows “should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks” identified in DOL’s guidance. Quoting the US Supreme Court’s recent decision in Hughes v. Northwestern University (142 S. Ct. 737 (2022)), DOL reminds fiduciaries that the availability of prudent investment options on a plan’s investment menu doesn’t avoid liability for any imprudent options.

DOL’s inclusion of brokerage windows in its statement about investigating cryptocurrency offerings is surprising. In a recent report, the ERISA Advisory Council noted that participants who use brokerage windows tend to have above-average investment experience and financial sophistication — factors that prompted the council to limit its recommendations to DOL. The council also noted the lack of guidance on the application of ERISA’s fiduciary standards to brokerage windows and acknowledged that plan fiduciaries don't routinely monitor the underlying investments. Could DOL’s investigation of cryptocurrency signal broader scrutiny of brokerage windows?

More to come?

On March 9, President Biden issued an executive order (EO) outlining a “whole-of-government” approach to assessing the risks and benefits of digital assets. The EO includes a directive for the Treasury Department, in consultation with DOL, to submit a report on “the implications of developments and adoption of digital assets and changes in financial market and payment system infrastructures” for consumers, investors, and businesses. Although not specifically mentioned in the EO, retirement plans and participants will likely be part of the analysis.

DOL’s cryptocurrency guidance is also part of a recent trend of cautionary statements about DC plan investments, all couched in terms of protecting participants’ retirement savings. In December 2021, DOL released a statement cautioning fiduciaries of “typical” DC plans about offering private equity investments as components of professionally managed asset allocation funds, such as target-date or balanced funds. In proposed regulations issued last year, DOL also suggested that prudence “may often require” fiduciaries to evaluate the economic effects of climate change and other environmental, social, and governance factors when selecting investments. This dynamic regulatory environment presents ongoing challenges for DC plan fiduciaries.

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