The U.S. Department of Labor (DOL) published on March 10th, 2022, guidance urging plan fiduciaries to exercise caution regarding cryptocurrency 401(k) plan options. As plan fiduciaries select investment options for 401(k) plan investment menus, the DOL’s efforts seek to protect the retirement savings of millions of U.S. workers. Indeed, the new guidance follows the Biden Administration’s recent resolve to ensure the responsible development of cryptocurrency. Earlier, on March 7, the DOL amended class exemptions in prohibited transaction rules to remove credit rating conditions.
The Employee Retirement Income Security Act of 1974
The Employee Retirement Income Security Act of 1974 (ERISA) gives the DOL’s Employee Benefits Security Administration (EBSA) authority to protect employee retirement investments. In brief, the federal law sets minimum standards for private industry plans. Among the retirement plan requirements set forth by ERISA, are fiduciary responsibilities for managers and controllers of plan assets. Specifically, ERISA requires plan fiduciaries to act in the financial interests of plan participants. To that end, plan fiduciaries must take professional care when choosing investment options for inclusion in 401(k) plan menus. In fact, these obligations of prudence and loyalty are called “the highest known to the law.” After all, there were about 91 million 401(k) plan participants, representing $6.2 trillion in private pension plans in 2019. And in the end, fiduciaries are personally liable for any losses resulting from a breach of duty.
Cryptocurrency 401(k) Plans
According to the DOL, firms have recently marketed cryptocurrency investment as a 401(k) plan option for participants. In response, the DOL announced compliance assistance cautioning plan fiduciaries to exercise “extreme care” before considering cryptocurrency 401(k) plan options. In general, the DOL’s concerns mirror the Biden Administration’s stance on digital assets including cryptocurrency. President Joseph R. Biden outlined that stance in a recent Executive Order introducing a policy of protection, oversight, and responsible growth regarding digital assets.
Concerns Regarding Cryptocurrency
Within a 401(k) plan, the value of a retirement account depends on how well employer and employee contributions perform. Good performance is related, in part, to how prudent an investment is. Therefore, among the obligations of plan fiduciaries, is the responsibility to ensure that investment options in plan menus are prudent. As cryptocurrency is relatively new, yet already marketed as an investment option, the DOL questioned its prudence as an investment. In the DOL’s opinion, associated risks include fraud, theft, and loss related to the following reasons:
- Speculative and volatile investments including extreme fluctuations in price, uncertainty in valuing assets, fraud, and other factors.
- Difficulty in making informed investment decisions, separating the facts from the hype and the lack of knowledge compared to traditional investments.
- Custodial and recordkeeping concerns are inherent in how cryptocurrency is stored and digitally accessible.
- Valuation concerns regarding the reliability and accuracy of current methods of determining cryptocurrency value.
- The evolving regulatory environment and the number of market participants still operating outside of regulations.
Protecting Workers’ Retirement Benefits
Altogether, the DOL’s announcement serves to remind plan fiduciaries of their responsibilities under ERISA. Notably, it reiterates their obligation to act solely in the financial interests of participants. Fiduciaries must exercise prudence when choosing investment options for inclusion in 401(k) plan menus. With the prevalence of cryptocurrency as an investment option, fiduciaries must practice due caution, considering cryptocurrency’s associated risks.