DOL Provides Guidance on Providing 401(k) Plan Investments in Cryptocurrencies | Practical Law

DOL Provides Guidance on Providing 401(k) Plan Investments in Cryptocurrencies | Practical Law

The Department of Labor (DOL) issued Compliance Assistance Release No. 2022-01, which provides guidance on providing 401(k) plan investments in cryptocurrencies.

DOL Provides Guidance on Providing 401(k) Plan Investments in Cryptocurrencies

Practical Law Legal Update w-034-7901 (Approx. 4 pages)

DOL Provides Guidance on Providing 401(k) Plan Investments in Cryptocurrencies

by Practical Law Employee Benefits & Executive Compensation
Published on 11 Mar 2022 • USA (National/Federal)
The Department of Labor (DOL) issued Compliance Assistance Release No. 2022-01, which provides guidance on providing 401(k) plan investments in cryptocurrencies.
On March 10, 2022, the DOL issued Compliance Assistance Release No. 2022-01: 401(k) Plan Investments in "Cryptocurrencies" (2022-01) to caution 401(k) plan fiduciaries to exercise "extreme care" before adding cryptocurrencies as investment options for plan participants.
2022-01 outlines the duties of ERISA plan fiduciaries, including the duty to ensure the prudence of a 401(k) plan's investment options on an ongoing basis. Plan fiduciaries breach their duty to the plan by failing to remove imprudent investment options, and 2022-01 quotes the Supreme Court's recent decision in Hughes v. Northwestern University in support of this point (142 S.Ct. 737, 742 (2022); see Legal Update, Supreme Court Holds That Seventh Circuit Did Not Properly Apply Tibble's Guidance in Hughes v. Northwestern University).
2022-01 explains that the DOL has serious concerns about the prudence of a 401(k) plan fiduciary's decision to expose a plan's participants to:
  • Direct investments in cryptocurrencies.
  • Other products whose value is tied to cryptocurrencies.
2022-01 provides five reasons why the cryptocurrency investments present significant risks and challenges to 401(k) plan participants' retirement accounts:
  • Investment in cryptocurrencies is highly speculative and subject to extreme price volatility.
  • It is very difficult to accurately and objectively evaluate cryptocurrencies. Plan participants are less likely to have sufficient knowledge of these investments. By including cryptocurrencies on a 401(k) plan's investment menu, plan fiduciaries essentially communicate to participants that this investment is a prudent option, which could mislead participants and cause plan losses.
  • There are many custodial and recordkeeping difficulties relating to cryptocurrencies.
  • The accuracy of cryptocurrency valuations is in dispute.
  • The regulatory regime governing cryptocurrencies is extremely fluid at this time. Plan fiduciaries must take care to avoid participating in unlawful transactions, which might inadvertently occur if a cryptocurrency option were included as a plan investment.
2022-01 also announces that the DOL expects to investigate retirement plans that offer cryptocurrency investment options. The DOL will question plan fiduciaries responsible for overseeing cryptocurrency investment options or allowing these investments through brokerage windows regarding how these investments are compatible with their duties of loyalty and prudence under ERISA (see Practice Note, Brokerage Windows for Defined Contribution Plans).

Practical Implications

401(k) plan fiduciaries would do well to review 2022-01 and heed EBSA's guidance to exercise extreme care before adding cryptocurrency investments as an investment option for participants. These investments have significant risks of fraud, theft, and loss (see Cybersecurity for Retirement Plans Toolkit). For more information on the legal and practical issues retirement plan sponsors should consider, see Expert Q&A on Cryptocurrency and Retirement Plans.
To learn more about fiduciary duties under ERISA, see Practice Note, ERISA Fiduciary Duties: Overview.