DOL Issues Warning About Crypto Assets in DC Plans

The lead regulator of employer-sponsored retirement plans says cryptocurrencies and other digital assets are subject to a variety of issues that make them untenable—at least at this stage—for investment by plan participants.

The U.S. Department of Labor on Thursday published compliance assistance for 401(k) plan fiduciaries considering plan investments in cryptocurrencies.

According to the DOL’s announcement, formally referred to as Compliance Assistance Release No. 2022-01, the goal of the compliance assistance is to protect the retirement savings of U.S. workers from extreme volatility and legal risks.

Published by the DOL’s Employee Benefits Security Administration, the compliance assistance cautions plan fiduciaries to exercise “extreme care” before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants. As the EBSA points out, the Employee Retirement Income Security Act of 1974 requires plan fiduciaries to act solely in the financial interests of plan participants and adhere to the standards of professional care in considering investment options for participants in 401(k) plans.

“Today’s announcement reminds plan fiduciaries of their important role in selecting investment options for 401(k) plan menus,” says Employee Benefits Security Administration Acting Assistant Secretary Ali Khawar. “At this stage of cryptocurrency’s development, fiduciaries must exercise extreme care before including direct investment options in cryptocurrency.”

The full text of the release, available here, is complemented by an informal blog post published by Khawar. In the release, the EBSA says cryptocurrencies tend to be too speculative and volatile investments to serve a meaningful purpose in tax-qualified retirement plans. As the release explains, at this stage in their development, cryptocurrencies have been subject to extreme price volatility, which may be due to the many uncertainties associated with valuing these assets. Other issues cited by the EBSA include the speculative conduct of crypto market participants and the security risks demonstrated by widely published incidents of theft and fraud.

The EBSA says cryptocurrencies are often promoted as innovative investments that offer investors unique potential for outsized profits. As such, the EBSA says, these investments can all too easily attract investments from inexpert plan participants with great expectations of high returns and little appreciation of the risks the investments pose to their retirement investments. The release emphasizes that cryptocurrencies are very different from typical retirement plan investments, and it can be extraordinarily difficult, even for expert investors, to evaluate these assets and separate the facts from the hype.

Other concerns cited by the EBSA relate to custodial and recordkeeping considerations, which are extremely important in the ERISA fiduciary context. The EBSA says cryptocurrencies are not held like traditional plan assets in trust or custodial accounts, nor are they readily valued compared with other assets or available to pay benefits and plan expenses. With some cryptocurrencies, EBSA warns, simply losing or forgetting a password can result in the loss of the asset forever, while other methods of holding cryptocurrencies can be vulnerable to hackers and theft.

According to the EBSA, the rules and regulations governing the cryptocurrency markets may be evolving, and some market participants may be operating outside of existing regulatory frameworks or not complying with them. Fiduciaries who are considering whether to include a cryptocurrency investment option will have to include in their analysis how regulatory requirements may apply to issuance, investments, trading or other activities and how those regulatory requirements might affect investments by participants in 401(k) plans.

To this end, the EBSA cites a theoretical example wherein the sale of some cryptocurrencies could constitute the unlawful sale of securities in unregistered transactions. Plan fiduciaries must take care to avoid participating in unlawful transactions, exposing themselves to liability and plan participants to the risks of inadequate disclosures and the loss of investor protections that are guaranteed under the securities laws.