The DOL Cautions Extreme Care When ERISA Fiduciaries Consider Offering Cryptocurrency as a 401(k) Plan Investment Option

March 14, 2022

On March 10, 2022, the U.S. Department of Labor (DOL) issued Compliance Assistance Release No. 2022-01 addressing its serious concerns about the prudence of a fiduciary’s decision to include cryptocurrencies as an investment option in a participant directed 401(k) plan. The DOL highlighted that it is a fiduciary decision to include an investment option in a participant directed plan; that the decision and the obligation to monitor a plan’s investment menu is subject to ERISA’s prudence standard of care; and that a breach of ERISA’s fiduciary standards will subject the breaching fiduciary to personal liability.

The DOL wrote these investments “present significant risks and challenges to participants’ retirement accounts” and outlined the following concerns:

  1. Cryptocurrency is highly speculative and is subject to extreme price volatility. Participants approaching retirement may be devastated by the extreme volatility if substantially allocated to cryptocurrency when approaching retirement.
  2. There is a challenge to participants making informed investment decisions regarding investment in cryptocurrency because these investments too easily attract investments from participants with great expectations of high returns and little appreciation of the risks. The DOL stated that when a fiduciary chooses to include cryptocurrency as an investment option in a 401(k) they effectively indicate to participants that knowledgeable investment experts have approved the investment as a prudent option for participants.
  3. Custodian and recordkeeping difficulties exist for fiduciaries of retirement plans which offer digital assets as an investment option.
  4. The valuation of cryptocurrencies is complex and challenging. There is not currently agreement among experts regarding the appropriate method of valuation and market intermediaries do not have the same level of accounting, reporting and data requirements as intermediaries working with more traditional investment products.
  5. Participants and fiduciaries may not have the ability to continuously comply with the evolving regulatory environment of cryptocurrency.

The DOL additionally announced its intention to conduct an investigative program aimed at plans offering cryptocurrencies and related products and to take action in order to protect participants and beneficiaries.

Plan fiduciaries who offer cryptocurrency as an investment option will have an increased chance for a DOL investigation and should expect to be questioned regarding how the inclusion of cryptocurrencies in their 401(k) investment menu meets their ERISA fiduciary duties of prudence. Any plan which currently offers investment in cryptocurrency either directly or indirectly should consider whether to continue to offer such investment considering the DOL’s announced concern and focus on this area, and the roadmap laid out by the DOL for private causes of action should the investments suffer losses.

If you have any questions regarding cryptocurrency as a 401(k) investment option, please contact S. John Ryan at (212) 574-1679, Michael O’Brien at (212) 574-1505, or Bradley Fay at (212) 574-1429.