U.S. Department of Labor Publishes Cryptocurrency Guidance for 401(k) Plans:

On March 10, 2022, the U.S. Department of Labor (the “DOL”) released its first guidance on including investments in cryptocurrencies in a 401(k) plan’s investment lineup. This guidance is Compliance Assistance Release No. 2022-01 (“2022-01”). It reflects the DOL’s concern about 401(k) plans offering those types of investments to participants, in plans that allow them to direct how their plan account is invested.

2022-01 begins by noting that as the U.S. Supreme Court recently explained in Hughes v. Northwestern University, “even in a defined-contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.” The DOL also notes here that fiduciaries’ failure to remove imprudent investment options constitutes a breach of their duties under ERISA.

2022-01 then states that “[a]t this early stage in the history of cryptocurrencies, the [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.” The DOL states that those investments present significant risks and challenges to participants’ plan accounts (e.g., significant risks of fraud, theft, and loss) for the following reasons:

  • Cryptocurrencies involve highly-speculative investments that are subject to extreme price volatility.
  • Participants are less likely to have sufficient knowledge about these investments, as compared to traditional investments, or to have the technical expertise necessary to make informed decisions about whether to invest in them.
  • Unlike traditional plan assets, cryptocurrencies are not held in a trust or in custodial accounts and are not readily valued and available to pay benefits and plan expenses.
  • Even experts have described the question of how to appropriately value cryptocurrencies as complex and challenging, noting that “none of the proposed models for valuing cryptocurrencies are sound or academically defensible…”
  • Although rules and regulations governing the cryptocurrency markets “may be evolving,” cryptocurrency investments in a 401(k) plan would expose participants to the risks of inadequate disclosures and the loss of investor protections that are guaranteed under current securities laws.

Overall, the DOL “cautions plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.”