DOL Issues Guidance Warning Against Crypto Investments in 401(k) Plans

On March 10, 2022, the Department of Labor (“DOL”) issued guidance on the use of cryptocurrency in plans governed by ERISA.  In an unusual move, the DOL has cautioned fiduciaries to “exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.” The announcement applies to cryptocurrencies as well as digital assets, which include “tokens,” “coins,” “crypto assets” and any derivates thereof.

Cryptocurrencies are digital currency created and exchanged over a decentralized computer network. Although Bitcoin is the first and best-known cryptocurrency, thousands of cryptocurrencies now exist.

Investment in crypto assets by defined contribution plans remains uncommon, and most leading 401(k) record keepers do not permit cryptocurrencies to be traded directly on their platforms. Recently, however, several companies have begun to market services that would allow 401(k) plan participants to invest in cryptocurrency using specialized cryptocurrency exchanges.  In any case, before jumping into the sea of crypto, plan fiduciaries should make sure they fully understand the potential risks.

ERISA plan fiduciaries are generally under strict obligations to ensure that all investment options within defined contribution retirement plans, including 401(k) and 403(b) plans, are prudent investments. The DOL noted that a fiduciary’s duty under ERISA is the “highest known to the law.” A fiduciary who breaches those duties is personally liable for any losses to the plan resulting from that breach. As such, a fiduciary’s consideration of whether to include an option for participants to invest in crypto will be judged against those lofty standards.

According to the DOL’s guidance, the Department has serious concerns about the prudence of a fiduciary’s decision to expose plan participants to direct investments in crypto or other products whose value is tied to crypto. In doing so, the DOL cited the speculative and volatile nature of investing in cryptocurrencies, the inability for plan participants to make informed investment decisions, the inability for plan trustees to physically hold a stock certificate or other asset in a cryptocurrency, concerns about the reliability of valuation of cryptocurrency, and the lack of regulation of cryptocurrency markets.

The DOL concluded its guidance by stating the following:

Based on these and other concerns, [the Employee Benefits Security Administration] expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments. 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.

A “brokerage window” is also known as a “self-directed brokerage account,” in which participants can select their own investment options outside of the plan’s regular investment lineup. Until now, the DOL has not provided any guidance related to a fiduciary’s responsibilities for investments selected by participants in a brokerage window.

In essence, the DOL is putting plan sponsors on notice that they will be watching. As a result, 401k plans should proceed with caution in evaluating whether to incorporate crypto into their investments.