DOL issues guidance on cryptocurrency retirement plan investments

Earlier last month, the Department of Labor (DOL) issued guidance relating to cryptocurrency as an investment option in participant directed 401(k) plans. It was the closest the DOL has ever come to saying “No way!” on a fiduciary issue.

Crypto Guidance

The Employee Retirement Income Security Act of 1974 (ERISA), the federal law that governs most qualified retirement plans, imposes duties on fiduciaries – individuals responsible for the operation of the plan – one of which is to exercise “prudence” when selecting the investment options offered to plan participants. The DOL has communicated in both formal and informal guidance that the prudence of an investment option depends on the facts and circumstances and, except in a few very specific circumstances, ERISA does not prohibit any given type of investment (assuming no prohibited transactions, of course). The recent guidance is therefore notable in how far it goes in expressing the DOL’s extreme concern and outright skepticism with respect to cryptocurrency.

Specifically, on March 10, 2022, the DOL issued Compliance Assistance Release 2022-01, 401(k) Plan Investments in “Cryptocurrencies.” (Crypto Guidance). Right from the start, the Crypto Guidance warns fiduciaries to “exercise extreme care before they consider” adding a cryptocurrency option to a 401(k) plan’s investment menu. Note that the DOL urged “extreme care” before considering a cryptocurrency investment vehicle – normally, the DOL indicates that a fiduciary must exercise “prudence” when selecting a potential investment. The DOL does not say whether, and if so how, extreme care differs from prudence, but the Crypto Guidance outlines the DOL’s concerns that presumably underlie its admonition to use “extreme care” even before considering a cryptocurrency investment vehicle.

In particular, the DOL expressed “serious concerns about the prudence” of exposing participants to investment in cryptocurrencies, because of DOL-identified “significant risks and challenges” to retirement accounts, including “significant risks of fraud, theft, and loss.” According to the DOL, these risks are due to:

• Speculative and volatile investments: The DOL notes that the Securities and Exchange Commission has cautioned that investment in cryptocurrency “is highly speculative” and subject to “extreme price volatility.”
• The challenge for plan participants to make informed investment decisions: The DOL comments that “it can be extraordinarily difficult, even for expert investors, to evaluate these assets and separate the facts from the hype.”
• Custodial and recordkeeping concerns: How are assets that exist only as lines of computer code held in custody? Losing a password can mean losing the asset (and this is considered a feature, not a bug, by the cryptocurrencies themselves).
• Valuation concerns: There is no agreement as to how cryptocurrency should be valued and different intermediaries may use inconsistent valuation methodologies.
• Evolving regulatory environment: Because the law around cryptocurrency is still evolving, some market participants may be acting at or beyond the boundaries of legality. Thus, the DOL states fiduciaries “will have to include” analysis of how regulatory requirements may apply to issuance, investment in, and trading of cryptocurrency and how that might, in turn, impact a 401(k) plan participant’s investment. Fiduciaries would have to take care not to accidentally participate in illegal transactions, and the use of cryptocurrency in illegal activities could impact 401(k) plan investors (for example, if law enforcement agencies shut down a platform or restrict the use of a particular cryptocurrency).

Because of these “and other concerns,” the Crypto Guidance concludes, the DOL expects to conduct an investigative program (meaning – open DOL investigations) on plans that offer participants cryptocurrency products. The Crypto Guidance ends with a final warning:

“The plan fiduciaries responsible for overseeing such investment options or allowing such investments 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 described above.”

While the DOL never outright says “No way,” the DOL’s current message on cryptocurrencies in 401(k) plan investment menus is clear – stay away or be prepared for the worst.