DOL urges plan fiduciaries to exercise “extreme care” under threat of investigation

On March 10, 2022, the U.S. Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) issued Compliance Assistance Release No. 2022-1 401(k) Plan Investments in “Cryptocurrencies,” which cautions plan sponsors to exercise “extreme care” when considering whether to make cryptocurrency investment products available to participants as part of their plans’ investment lineup or self-directed brokerage account (SDBA). It further warns plan sponsors that including these investment options could subject them to investigation for breaching their fiduciary duty under Employee Retirement Income Security Act (ERISA) to act solely in the financial interests of plan participants when selecting and monitoring plan investments. 

What you should know 

Compliance Assistance Release No. 2022-1 appears to be in response to both the DOL’s awareness that firms are marketing potentially risky cryptocurrency products to 401(k) plans as investment options and President Biden’s Executive Order on Ensuring Responsible Development of Digital Assets, which called for reviewing the government’s regulatory approach to cryptocurrencies.

The DOL views cryptocurrencies as potentially inappropriate investment options for 401(k) plans because they pose significant risk of fraud, theft, or loss for the following reasons:

  • These investments can be speculative and volatile, potentially putting participants’ retirement security at risk.
  • Plan participants may not be able to discern hype from fact, limiting their ability to make informed investment decisions.
  • Custodial and recordkeeping concerns related to digital storage make these assets vulnerable to hackers, theft, and permanent inaccessibility if a password is lost or forgotten.
  • Cryptocurrency valuation methods can be unreliable and inconsistent.
  • The regulatory environment for cryptocurrencies is evolving, putting plans and investments at risk of being out of compliance as rules and regulations change.

The EBSA intends to investigate plans that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments. Plan sponsors willing to undergo the EBSA’s investigative program in order to offer cryptocurrencies as investment options must be prepared to demonstrate how these products meet the fiduciary duty of prudence and loyalty.

If a plan permits participants to invest in an SDBA, plan sponsors should:

  • Investigate whether the provider permits investment in cryptocurrencies or related products whose value is tied to cryptocurrencies.
  • Ask the plan recordkeeper for assistance with how to best direct the inquiry and provide instructions to the SDBA provider.
  • Consider whether it may be necessary to direct the SDBA provider to discontinue and/or not make such products available to plan participants given the uncertain regulatory environment.

In light of the DOL’s concerns, plan sponsors should discuss with the ERISA counsel before adding cryptocurrency as an investment option or within SDBAs.

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