In recently issued Compliance Assistance Release No. 2022-01 (the “Release”), the Department of Labor (the “Department”) addressed cryptocurrencies as 401(k) plan investments. To the surprise of some and the delight of others, the Department did not shut the door on these investments. It did, however, counsel extreme caution.
The Release opens with the familiar admonition that fiduciaries must act solely in the financial interests of plan participants and adhere to an exacting standard of professional care. Looking to Supreme Court precedent for further clarification, the Department says that:
“[E]ven 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.” [Hughes v. Northwestern University, 142 S.Ct. 737, 742 (2022)]
According to the Department, “cryptocurrency investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss.” As a result, the Department expressed its serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies.
The Release outlines a series of issues, including that cryptocurrency investments are speculative and volatile and that the promises made by cryptocurrency promoters are difficult to evaluate. In addition, because these investments generally exist as lines of computer code in a digital wallet, they present novel custodial, recordkeeping and valuation challenges. The Department also cited the evolving regulatory environment in which the cryptocurrency markets operate as something that fiduciaries must navigate.
Claiming, “the sale of some cryptocurrencies could constitute the unlawful sale of securities in unregistered transactions,” the Department admonished fiduciaries to take care to avoid participating in unlawful transactions. These transactions would expose fiduciaries to liability, and plan participants to the risks of inadequate disclosures and the loss of investor protections that are guaranteed under the securities laws. The Department also cited to warnings from the Financial Industry Regulatory Authority (FINRA) to the effect that cryptocurrencies have “been used in illegal activity, including drug dealing, money laundering, and other forms of illegal commerce.”
Based on these and other concerns, the Department announced that it expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments.
We suppose that plan sponsors and plan fiduciary committees could use the Release as a basis for proceeding with cryptocurrency investments, but we think that would be a mistake. The Department’s description of its concerns and issues is compelling. It should give any thoughtful fiduciary pause. The better approach might be to use the Release as a reason to wait until the Department has the opportunity to study the matter and issue further guidance that may serve to justify cryptocurrency as a prudent retirement plan investment option.