The DOL has issued a compliance assistance release expressing “serious concerns” about the prudence of making cryptocurrency investments available to 401(k) plan participants and advising fiduciaries to use “extreme care” before they consider adding a cryptocurrency investment option. The release explains that fiduciaries may be personally liable for breaching their fiduciary duties under ERISA, which include selecting and retaining only prudent investments. Under the U.S. Supreme Court’s recent Hughes decision (see our Checkpoint article), the fact that participants may choose other investments will not protect fiduciaries from liability for including imprudent investments as options in a plan’s investment menu.
The release identifies five factors that contribute to the challenge and risk of offering cryptocurrency investments at this early stage in their development. Cryptocurrency investments are highly speculative and subject to extreme price volatility, which may be especially harmful for participants approaching retirement or those who allocate substantial portions of their accounts to cryptocurrency. Evaluating cryptocurrency investments is difficult even for expert investors, and participants offered a cryptocurrency option may assume the investment is prudent, underestimate the risk, and suffer losses. Cryptocurrency presents custodial and recordkeeping concerns, including password loss, hacking, and theft. Valuation concerns include the lack of a generally accepted model for valuing cryptocurrencies, the potential for inconsistent accounting treatment, and differing reporting and data integrity requirements. And finally, because the regulatory environment is unsettled, fiduciaries will need to analyze for themselves how regulatory requirements can be met and address the possibility that law enforcement could limit or prevent the use or trading of cryptocurrency investments (making them illiquid) in response to illegal activity.
Based on these and other concerns, the DOL intends to investigate plans that offer cryptocurrency investments and take enforcement action to protect participants. The release warns fiduciaries who are responsible for cryptocurrency investments—whether as part of the plan’s investment menu or through brokerage windows—that they “should expect to be questioned about how they can square their actions with” their fiduciary duties in light of the risks these investments pose.
EBIA Comment: The lure of outsized profits has generated considerable interest in cryptocurrency investments, but the DOL clearly thinks they are not ready for prime time. By highlighting the various, and possibly insuperable, obstacles and risks inherent in these investments, emphasizing fiduciaries’ potential personal liability, and threatening enforcement action, the release expresses strong skepticism that cryptocurrency investments in a 401(k) plan can be prudent. And contrary to the assumptions of some fiduciaries, the DOL’s position seems to be that fiduciary liability risk cannot be avoided by allowing such investments through brokerage windows, as even those arrangements will be questioned under the agency’s anticipated investigative program. For more information see EBIA’s 401(k) Plans manual at Sections XXV.D (“Selecting the Plan’s Investment Funds”) and XXXII.C (“DOL Investigations”).
Contributing Editors: EBIA Staff.