Under investigation: Crypto in 401(k) plans

In Compliance Assistance Release No. 2022-01, the U.S. Department of Labor (DOL) recently expressed “serious concerns” about the prudence of offering cryptocurrency investments to 401(k) plan participants. The agency advised fiduciaries to use “extreme care” before they consider adding such an option.

The release explains that fiduciaries can be held personally liable for breaching their duties under the Employee Retirement Income Security Act, which includes selecting and retaining only prudent investments. It also points out that the U.S. Supreme Court’s recent decision in Hughes v. Northwestern University has indicated that just because participants may choose other investments from a plan’s menu doesn’t mean fiduciaries are safe from liability for including imprudent options.

5 risk factors

In the release, the DOL identifies five factors that contribute to the challenge and risk of offering “crypto,” as it’s commonly called, at this early stage in its development:

1. Cryptocurrency investments are highly speculative and subject to extreme price volatility. This makes them especially risky for participants approaching retirement or those who allocate substantial portions of their accounts to crypto.
2. Evaluating cryptocurrency investments is difficult even for expert investors, and participants who are offered a crypto option might assume the investment is prudent, underestimate the risk and suffer losses.
3. Cryptocurrency presents custodial and recordkeeping concerns, including password loss, hacking and theft.
4. Valuation concerns include the lack of a generally accepted model for valuing crypto, the potential for inconsistent accounting treatment, and differing reporting and data integrity requirements.
5. Because the regulatory environment is unsettled, fiduciaries will need to analyze for themselves how to meet regulatory requirements. They’ll have to address the possibility that law enforcement could limit or prevent the use or trading of cryptocurrency investments — making them illiquid — in response to illegal activity.

Based on these and other concerns, the DOL intends to investigate plans that offer crypto and take enforcement action to protect participants. The release warns fiduciaries who are responsible for cryptocurrency investments — whether as part of the plan’s menu or through brokerage windows — that they “should expect to be questioned about how they can square their actions with” their fiduciary duties in light of the distinctive risks.

Strong skepticism

The lure of substantial profits has generated considerable interest in crypto. However, the DOL clearly thinks that it’s not quite ready for prime time. The overall message of Compliance Assistance Release No. 2022-01 is one of strong skepticism regarding the prudence of offering cryptocurrency investments in a 401(k) plan.

And contrary to the assumptions of some fiduciaries, the DOL’s position seems to be that fiduciary liability risk cannot be avoided by allowing such investments through brokerage windows. Even these arrangements will be questioned under the agency’s anticipated investigative program. Our firm can help your organization assess the costs and risks of a 401(k) or any other type of employer-sponsored retirement plan.

© 2022