DOL makes no secret of its concerns about crypto

The U.S. Department of Labor (DOL) issued Compliance Assistance Release No. 2022-01 on March 10, 2022, cautioning 401(k) plan fiduciaries to “exercise extreme care” before they allow participant investments in cryptocurrency or crypto-related products. This guidance comes a day after President Biden’s executive order, directing federal agencies to coordinate efforts to study the risks and benefits of cryptocurrency and consider new regulations. 

In the compliance assistance release, DOL said that, “at this early stage in the history of cryptocurrencies, [DOL] has serious concerns about the prudence of a fiduciary's decision to expose a 401(k) plan's participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies.” Cryptocurrency presents “significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft and loss”, DOL wrote, in addition to the following highlighted reasons: 

1. Warnings from the Securities and Exchange Commission that investment in cryptocurrency is highly speculative and subject to extreme volatility;
2. Challenges to plan participants to make informed investment decisions about cryptocurrency because it is often pitched as innovative with the potential for vast profits, even though “it can be extraordinarily difficult, even for expert investors, to evaluate”;
3. Concerns about custodial and recordkeeping issues due to the illusory, digital nature of cryptocurrency, as compared to traditional plan assets that are held in trust or custodial accounts; 
4. Issues related to the reliability and integrity of valuations of cryptocurrency; and
5. Risks associated with plan participants’ ability to continuously comply with the evolving rules and regulations governing cryptocurrency.

Perhaps more troubling, DOL said that “[t]he 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.” (emphasis added)  Plan fiduciaries of 401(k) plans with brokerage windows that include cryptocurrency—or more likely a product that invests in crypto futures, such as a mutual fund or exchange traded fund—should evaluate whether they should continue to offer these types of investments, at least on a prospective basis. 

ESsentials:  DOL’s position on brokerage windows seems to run counter to the view often taken by plan fiduciaries, that the plan fiduciary has a duty to prudently select and monitor the provider of the brokerage window but not the investment options chosen by participants through that window (particularly when those investments are publicly traded mutual funds or exchange traded funds).

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