DOL's cryptocurrency warning: Not so fast, 401(k) plan fiduciaries

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No one would be surprised that cryptocurrency investors applauded Fidelity’s move to offer cryptocurrency in 401(k)s, and though it’s possibly not true of every plaintiffs’ attorney, at least some plaintiffs’ attorneys, used to going after plan sponsors for excessive fees, may well have been cheering the appearance of a new litigation avenue to pursue.

And the DOL? Its recent concerns about the issue can’t be ignored, at least because they could signal a new area of auditing interest.

For perspective from the fiduciary insurance side, we turned to Wendy Von Wald, Fiduciary Liability Product Manager at Travelers.

BenefitsPRO: Why did the U.S. Department of Labor recently issue a warning involving cryptocurrency and 401(k) retirement plans?

Wendy Von Wald: Because of the uncertainty and volatility that comes with cryptocurrency, the Department of Labor wanted to remind fiduciaries and plan advisors of their obligations. Under the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries must act in the best interests of plan participants. Choosing to invest in something like cryptocurrency that has had a significant risk of theft, fraud and loss could be perceived as a breach of fiduciary duty. This warning that the Department of Labor sent out – Compliance Assistance Release No. 2022-01 is worded quite strongly – outlines why a 401(k) retirement plan is not appropriate for this kind of investment.

What impact does the Department of Labor’s warning have on fiduciaries or plan advisors?

If the warning is adhered to, it likely results in fewer fiduciaries and plan advisors adding cryptocurrency to their 401(k) investment offerings. That’s what the Department of Labor wants right now, because of five primary areas of concern:

  • Speculative and Volatile Investments: Volatility in investments can negatively impact plan participants, especially those approaching retirement.
  • Making Informed Decisions: The complexity of the thousands of cryptocurrencies that exist makes it difficult for fiduciaries to evaluate these assets.
  • Recordkeeping Concerns: Unlike most other plan assets, cryptocurrency is often lines of computer code placed in a virtual wallet. That opens itself up to the risk of loss or theft.
  • Valuation Concerns: How to accurately value cryptocurrency is proving to be a challenge, with experts disagreeing on certain aspects of the market.
  • Evolving Regulatory Environment: It can be difficult for plan sponsors to make sure cryptocurrency transactions are lawful since participants may be operating outside of regulations, and those regulations are evolving.

What could the punishment or penalties be if plan advisors or fiduciaries offer cryptocurrency as a 401(k) investment choice?

The Department of Labor expects it will have a program investigating plans that offer cryptocurrency investments to 401(k) plans either as direct investment options or through brokerage window. These investigations can result in enforcement activity on the part of the Department of Labor.

For those interested in investing in cryptocurrency, what options would there be if it’s not available in a 401(k) retirement plan?

There is no shortage of cryptocurrency options for those looking to invest. Like any other investment, the suggestion is always to do enough research before pulling the trigger.

Do you think this could be a short-term warning from the Department of Labor, and over time it might be more willing to allow 401(k) plans to explore cryptocurrency as an investment?

It all depends on how volatile the market continues to be. This Department of Labor warning makes perfect sense now, reminding fiduciaries of the obligations that come with the position. But cryptocurrency has evolved and will continue to evolve. It’s impossible to predict what the future holds. It’s important for fiduciaries and plan advisors to be aware of the applicable rules and regulations when making investment decisions for 401(k) and other retirement plans.