Retirement Plan Provider Sues DOL in 401(k) Cryptocurrency Row

A retirement plan provider that championed cryptocurrency for 401(k) plans has brought a lawsuit against the Department of Labor for dismissing cryptocurrency as a reasonable investment for retirement plans.

A cryptocurrency kerfuffle has erupted between the Department of Labor and ForUsAll, a retirement investment platform for small businesses.  

In a newly filed complaint, ForUsAll claims that the Department of Labor is violating the Administrative Procedure Act with a compliance bulletin on cryptocurrency in 401(k) plans. The complaint argues that the DOL’s March 10 compliance bulletin on cryptocurrency should be vacated, and the plaintiff seeks related declaratory, injunctive and other relief.

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“While this lawsuit arises in the context of cryptocurrency, unless the principles at stake here are addressed to require DOL to operate strictly within the limits of its legal authority and to follow the law in undertaking agency actions, tomorrow unlawful federal agency action could just as easily extend to any other type of investment or investment strategy that senior officials at DOL—in this or any future administration—do not find to be entirely to their liking,” the complaint states.

The Department of Labor and Secretary Marty Walsh are named as defendants in the lawsuit brought before the United States District Court for the District of Columbia.

The DOL’s March compliance bulletin “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.”

The bulletin also states that the DOL “has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies. These investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss…”

The ForUsAll complaint challenges the DOL’s approach to cryptocurrency in 401(k)s. Plaintiffs blast the bulletin as an “arbitrary and capricious attempt” to limit the use of cryptocurrency in defined contribution plans, and charge that it overstepped its authority under the Employee Retirement Income Security Act and disregarded the notice and comment process required under the APA.

The lawsuit was brought “to preserve the rights of American investors to choose how to invest money in their own retirement accounts,” the complaint states.

Plaintiffs also argue in the complaint that “no asset class is presumptively imprudent under ERISA” and that “ERISA does not mandate paternalism with respect to participant investments.”

Championing cryptocurrency for 401(k) plans was further rebuked by the DOL last month, when it took a dim view of Fidelity Investments’ introduction of a Digital Assets Account providing investment access to bitcoin for 401(k) core investment lineups. DOL Acting Assistant Secretary of the Employee Benefits Security Administration Ali Khawar was quoted by the Wall Street Journal as saying, “We have grave concerns with what Fidelity has done.”

The ForUsAll lawsuit involves two counts against the DOL: failure to engage in notice and comment rulemaking under APA and arbitrary and capricious action in excess of statutory authority under APA § 706 and Declaratory Judgment Act, 28 U.S.C § 2201.

“The release should be vacated and set aside under the APA, and DOL should be enjoined from attempting to enforce it,” the complaint states.

ForUsAll was early to embrace enabling employers to provide DC plan participants with access to cryptocurrency, and launched the Alt 401(k) in 2021. In the complaint, ForUsAll claims that it was the first retirement plan provider that made cryptocurrency available to 401(k) plan participants through a self-directed window.

So-called investment windows, including brokerage windows, allow plan participants to invest in a variety of investments beyond the menu of designated investments offered directly by their plan.  

Under ERISA, plan sponsors maintain twin duties of loyalty and prudence to participants when selecting investments for a plan’s menu, as well as responsibility for ongoing oversight of investments.

ForUsAll argues in the complaint that the DOL’s cryptocurrency stance violated its own statute with regards to the rules for investment windows.   

“DOL regulations explicitly differentiate between investment options selected for inclusion by a fiduciary on a plan’s investment menu and investment options available to participants only if they opt in to the use of a brokerage window or similar arrangement,” the complaint states.

The lawsuit contends that the DOL—under the Code of Federal Regulations for fiduciary requirements for disclosure in participant-directed individual account plans—ignored important distinctions that led the regulator to a flawed cryptocurrency conclusion. 

Plaintiffs note that federal regulations provide a duty for plan fiduciaries to prudently select and monitor service providers to the plan and designated investment alternatives offered by the plan but not investment windows.

“DOL has never previously asserted that there is a general fiduciary obligation to select or monitor individual investments within a brokerage window, nor has any court held that such an obligation exists,” the complaint states.

According to the regulations cited in the complaint, “The term ‘designated investment alternative’ shall not include ‘brokerage windows,’ ‘self-directed brokerage accounts,’ or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan. By indicating that there is a fiduciary duty to prudently select and monitor designated investment alternatives, the regulation suggests that no such obligation applies if investments are unrestricted.”

Plaintiffs add that investments accessed through a brokerage window are not routinely monitored by plan fiduciaries.

The complaint states that “except perhaps in extraordinary circumstances, plan fiduciaries are not obligated to monitor brokerage window investments nor do their fiduciary duties apply with respect to those investments.”

Despite what plaintiffs claim about fiduciaries’ duty regarding investments made via the brokerage window, the Supreme Court in Hughes v. Northwestern ruled that “even in a defined-contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options,” the opinion states. “The failure to remove imprudent investment options is a breach of duty.”

The DOL did not return a request for comment on the lawsuit. 

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