The U.S. Department of Labor (the DOL) has issued a compliance release that provides strong caution against ERISA fiduciaries of 401(k) and 403(b) plans including cryptocurrencies as plan investment options. 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.”
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 selection of investment options made available to plan participants has historically been a heavily litigated area, with class-action lawsuits regularly being brought against employers who sponsor such plans, alleging imprudent plan investments.
This compliance release by the DOL is unusual because it represents the federal government singling out an entire class of investments that it believes to be imprudent. The release indicates that the DOL believes that inclusion of cryptocurrencies among the investment options in 401(k) and 403(b) plans present “significant risks and challenges” to retirement plan accounts, including the risks of fraud, theft, and losses to plan accounts. 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 release also includes a mention that fiduciaries who allow plan participants to invest in cryptocurrencies through a brokerage window should “expect to be questioned about how they can square their actions” with their ERISA fiduciary duties. 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.
Going forward, ERISA plan fiduciaries should avoid offering cryptocurrencies as an investment option until this regulatory landscape becomes more stable. We will expect the DOL to begin seeking and auditing ERISA retirement plans with cryptocurrency as plan assets, including those cryptocurrencies obtained through a brokerage window.