The U.S. Department of Labor’s Employee Benefits Security Administration has issued a guidance warning to defined contribution plan fiduciaries to “exercise extreme care” before they consider adding a cryptocurrency option to their 401(k) plan’s investment menu.
The department said that it has “serious concerns” about fiduciaries that expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies. The EBSA said the investments present “significant risks” and challenges to retirement plan accounts, including risks of fraud, theft, and loss.
The agency said it was compelled to issue the warning after becoming aware in recent months that companies were marketing investments in cryptocurrencies to 401(k) plans as potential investment options. The EBSA’s warning also applies to a wide range of digital assets, including those marketed as “tokens,” “coins,” and “crypto assets.”
As investing in digital assets becomes more mainstream, the concept of including crypto in retirement plans has been gaining some traction. In June, ForUsAll, a financial consultant that focuses on small businesses, launched its Alt 401(k) retirement investment platform, which allows employers to provide alternative investment options within their retirement plans. As the plan’s first alternative investment, ForUsAll provided employers the option to offer cryptocurrency investments. And according to a survey released by fintech company Capitalize, 56% of Gen Zers and 54% of Millennials include crypto investments in their retirement strategy.
EBSA noted that under the Employee Retirement Income Security Act of 1974, fiduciaries “must act solely in the financial interests of plan participants and adhere to an exacting standard of professional care.” It cautioned that fiduciaries who breach those duties are personally liable for any losses to the plan that are a result of the breach.
“A fiduciary’s consideration of whether to include an option for participants to invest in cryptocurrencies is subject to these exacting responsibilities,” EBSA said. “Fiduciaries may not shift responsibility to plan participants to identify and avoid imprudent investment options.”
The agency cited a recent Supreme Court ruling in the case of Hughes v. Northwestern University that said that “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.”
Five main reasons were provided by the Labor Department as to why investments in cryptocurrencies present significant risks and challenges to retirement plans:
- Speculative and Volatile Investments. Cryptocurrencies have been subject to extreme price volatility, which may be due to uncertainties associated with valuing the assets, speculative conduct, the amount of fictitious trading reported, and incidents of theft and fraud, among other factors.
- The Challenge to Informed Decisions: When plan fiduciaries choose to include a cryptocurrency option on a 401(k) plan’s menu, they effectively tell the plan’s participants that knowledgeable investment experts have approved the option as a prudent one. “This can easily lead plan participants astray and cause losses,” said the EBSA.
- Custodial and Recordkeeping Concerns: Cryptocurrencies are not held like traditional plan assets in trust or custodial accounts, readily valued and available to pay benefits and plan expenses. Instead, they generally exist as lines of computer code in a digital wallet, which means losing or forgetting a password can result in the loss of assets forever.
- Valuation Concerns: The department said it is concerned about the reliability and accuracy of cryptocurrency valuations. It noted that experts have fundamental disagreements about key aspects of the cryptocurrency market, adding that none of the proposed models for valuing cryptocurrencies are as sound or academically defensible as traditional discounted cash flow analysis for equities or interest and credit models for debt.
- Evolving Regulatory Environment: Some market participants may be operating outside of existing regulatory frameworks or not complying with them. Fiduciaries who are considering including cryptocurrency investment options will have to include in their analysis how regulatory requirements may apply to issuance, investments, trading, or other activities and how those regulatory requirements might affect 401(k) plans.
The EBSA said that it expects to conduct an investigative program aimed at retirement 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 the investments.
“The plan fiduciaries responsible for overseeing such investment options or allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty,” said the EBSA.