The U.S. Department of Labor 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.
Is it prudent for a Fiduciary to expose 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies?
The short answer is No. Based in the Compliance Assistance Release (No. 2022-01), the U.S. Department of Labor expressed its concerns over investments in cryptocurrencies to 401(k) plans as potential investment options for plan participants given that cryptocurrencies investments pose risks of fraud, theft, and loss to participants’ retirement accounts.
U.S. Department of Labor risk-assessment concerns over Cryptocurrencies:
- They are Speculative and Volatile Investments: subject to extreme price volatility, speculative conduct, fictitious trading, theft and fraud, and other factors.
- It is challenging for Plan Participants to Make Informed Investment Decisions: Cryptocurrencies may create unrealistic hopes of gain for “inexpert plan participants with great expectations of high returns and little appreciation of the risks the investments pose to their retirement investments”.
- Custodial and Recordkeeping Concerns: Cryptocurrencies (contrary to traditional plans being held in traditional plan assets in trust or custodial accounts), usually exist “as lines of computer code in a digital wallet. With some cryptocurrencies, simply losing or forgetting a password can result in the loss of the asset forever”.
- Valuation Concerns: Questions remain over the “reliability and accuracy of cryptocurrency valuations”.
- Evolving Regulatory Environment: President Biden signed a first Executive Order on Ensuring Responsible Development of Digital Assets on 3/9/22 acknowledging how the rise in digital assets creates an opportunity to reinforce the leadership of the U.S. in the global financial system as well as its implications for consumer protection, financial stability, national security, and climate risk. The Executive Order calls for a “Holistic Approach” involving all the moving parts of the U.S. Government.
“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”.
Plan administrators have a fiduciary role in our retirement regulatory system. The Compliance Assistance Release states that “when defined contribution plans offer a menu of investment options to plan participants, the responsible fiduciaries have an obligation to ensure the prudence of the options on an ongoing basis”.
If plan fiduciaries were to include a cryptocurrency option on a 401(k) plan’s menu, they would be implying that a cryptocurrency option is a “prudent option” when arguably it may not be. Let’s face it, cryptocurrency volatility can lead to losses for plan participants – especially as they approach retirement and after they are retired. ©