The United States Department of Labor (DOL) published Compliance Assistance Release No. 2022-01 (Release) on March 10, 2022, regarding the investment of “cryptocurrency” in 401(k) retirement plans. The Department of Labor issued a warning to plan fiduciaries considering cryptocurrency investment options in their retirement plans, noting major concerns over whether such investments are prudent and in furtherance of their fiduciary duties under the Employee Retirement Income Security Act of 1974, as amended (ERISA).
The move was widely criticized and had legal consequences for the DOL. According to the Crypto Council for Innovation (CCI), the DOL’s guidance is in conflict with instructions from the White House and President Biden’s Executive Order on crypto assets. Acting Assistant Secretary Ali Khawar has been requested to rescind DOL’s March guidance, Release No. 2022-01, that prevents 401(k) administrators from including crypto investment options in their plans.
Crypto Deemed Imprudent Plan Investment Asset Class by DOL
According to the DOL, there are a number of concerns regarding cryptocurrency investments in retirement plans, including their speculative and volatile nature, difficulties in valuation (even for seasoned investors), custodial and recordkeeping concerns, and the lack of a regulatory framework, which may result in unregistered transactions.
Plan fiduciaries can take away several important lessons from the Release. First, the DOL implied cryptocurrency will automatically be deemed imprudent plan investments, perhaps the first time the DOL has drawn such a broad conclusion on a specific form of plan investment. There is no specific statutory authority for the DOL to draw this conclusion, since the ERISA Act does not specifically allow an asset class to be de facto imprudent.
Second, and perhaps most importantly, the DOL warns that it will question plan fiduciaries about allowing access to cryptocurrencies through brokerage windows. Brokerage windows are typically used to offer participants access to buy and sell securities through their 401(k) plan account via a brokerage platform, allowing them to access a larger selection of investments than the plan’s core investment fund lineup.
DOL’s Anti-Blockchain & Crypto Investment Stance Based on Inability to Monitor Brokerage Window Transactions
Despite being packaged as cryptocurrency guidance, the DOL’s position may apply to far more than cryptocurrency. In this case, plan fiduciaries should examine whether they are fiduciarily liable for all transactions made through a brokerage window, not just cryptocurrencies. Given the potential number of transactions made via a brokerage window, it would be unreasonable to expect fiduciaries to monitor all of them.
According to the DOL, it anticipates investigating plans offering cryptocurrency as an investment option, looking for the basis for determining that such investments are prudent. As a result of the DOL’s strong opposition to cryptocurrency investments, as well as this heightened level of scrutiny, plan fiduciaries should be cautious when deciding whether to offer cryptocurrency as a plan investment option. Further, plan fiduciaries who provide access to brokerage windows may need to rethink how they monitor transactions made through them.