On March 10, 2022, the U.S. Department of Labor (DOL) published a compliance assistance release (Release) for 401(k) plan fiduciaries considering including cryptocurrencies as potential investment options for plan participants. In the Release, the DOL cautioned plan fiduciaries to “exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants” and reiterated that a plan fiduciary’s decision of whether to include an investment option is subject to the fiduciary obligations of prudence and loyalty that are the “highest known to law.” To that end, the Release stated that 401(k) plan fiduciaries have the duty to evaluate the prudence of any investment options offered, which duty cannot be shifted to plan participants even if the participants direct their own investments. The failure to remove imprudent investment options is a breach of fiduciary duty and may subject plan fiduciaries to personal liabilities for any losses incurred as a result.
The DOL cautioned in the Release that given the current stage of cryptocurrencies’ development, it has “serious concerns” about the prudence of a fiduciary’s decision to include cryptocurrencies, or products whose value is tied to cryptocurrencies, in the investment options of a participant-directed 401(k) account. More specifically, the DOL suggested that cryptocurrency investments present “significant risks and challenges to participants’ retirement accounts” including risks of fraud, theft, and loss for the following reasons:
- The Securities and Exchange Commission has cautioned that cryptocurrency investments are highly speculative and have had extreme price volatility.
- Because cryptocurrencies are very different from conventional retirement plan investments, plan participants will face significant difficulties in evaluating cryptocurrency assets and making informed decisions.
- Unlike traditional retirement plan assets, cryptocurrencies are not held in trust or custodial accounts, resulting in various custodial and recordkeeping issues such as vulnerability to hacking, theft, or loss of the asset due to lost passwords.
- The reliability and accuracy of cryptocurrency valuation remain cause for concern, as experts suggest that valuation models for cryptocurrencies are not as sound as those for traditional asset classes.
- Rules and regulations governing cryptocurrency markets may be evolving, and plan fiduciaries have to be mindful of how regulatory requirements may apply to investments in cryptocurrencies by participants in 401(k) plans.
The Release also indicates that 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 measures to protect the interests of plan participants and beneficiaries with respect to these investments. According to the Release, plan fiduciaries who have included cryptocurrencies in investment options or allowed such investments through brokerage windows will need to be prepared to show compliance with the fiduciary duties of prudence and loyalty in light of the risks associated with cryptocurrency investments.
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