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Is Cryptocurrency Too Risky for 401(k) Plans? The Controversy Continues

By Carol Buckmann ·

The Department of Labor’s compliance assistance release on cryptocurrency (CAR 2022-01) issued earlier this year was controversial and resulted in a lawsuit by provider ForUsAll to get the guidance vacated. In that guidance, the DOL not only suggested-without actually saying so- that cryptocurrency was not a prudent investment for 401(k) plan participants, but indicated that it expected to start an investigative program in which plan fiduciaries who permitted cryptocurrency investments would have to justify their decisions as consistent with their fiduciary duties. This guidance came shortly after President Biden issued an executive order calling for the U.S. to support technological advances that promote responsible development and use of digital assets and seemed to be out of step with it. Following the issuance of the guidance, Fidelity announced that it would nevertheless be making cryptocurrency investments available as part of its investment menu and stated that it disagreed with the DOL’s position.

Criticism Isn’t Limited to ForUsAll and Fidelity. Critics of the DOL’s position mainly questioned three components of the CAR: (1) ERISA does not allow the DOL to establish categories of per se prudent and imprudent investments, but the CAR seemed to assume that cryptocurrency investments were imprudent; (2) the CAR’s language stating that fiduciaries could be liable for making cryptocurrency investments available through self-directed brokerage accounts was inconsistent with the DOL’s own prior guidance and the industry’s  understanding of a fiduciary’s responsibility when offering self-directed brokerage accounts; and (3) the CAR was subregulatory guidance, which allowed the DOL to bypass the requirements of the Administrative Procedure Act protecting the right to comment on proposed regulations by simply issuing the guidance in another form.

New Developments. The depressed state of the crypto market has not eliminated demand. ForUsAll, which offers its program through a brokerage window, has not only not scrapped its program, but has just announced a partnership with Bitwise, a crypto payroll provider. Fidelity just hired 100 new employees to work in its cryptocurrency program, and crypto-related legislation has been introduced in Congress. Cryptocurrency proponents point out that stocks and other mainstream investments are also down and this may be a buying opportunity. Finally, the DOL has filed a motion to dismiss the ForUsAll lawsuit in papers which downplay the binding effect of its guidance.

DOL’s Motion to Dismiss

In its court papers, the DOL argued that the CAR was not binding guidance and therefore not subject to the notice and comment requirements of the Administrative Procedure Act. The DOL’s recent practice of issuing subregulatory guidance has been a concern of many benefits groups for some time because when the DOL issues this type of guidance without any prior public input, it puts fiduciaries not agreeing with the position or who think their facts are distinguishable in a difficult position. Even if the guidance isn’t technically binding, it puts them at risk of audit problems or lawsuits by participants. There is a catch-22 here for fiduciaries if the DOL can always issue important guidance without public input just by labeling it as subregulatory. This also hurts the DOL, which is missing out on critical input from stakeholders.

Congressional Activity

Senators Gillibrand and Lummis have responded to President Biden’s executive order by introducing the Responsible Financial Innovation Act providing for the Commodity Futures Trading Commission and, if there is a security, the SEC, to regulate cryptocurrency and calling for new agency asset security guidelines. If enacted, this would address many of the DOL’s concerns. Taking action more directly related to retirement plans, Senators Toomey and Scott and Representative Meijer have introduced the Retirement Savings Modernization Act. While not weakening ERISA’s fiduciary responsibility provisions, this legislation encourages plans to make alternative investments, including real estate, private equity, and cryptocurrency, available as part of a diversified investment portfolio. If the Retirement Savings Modernization Act is passed or folded into pending pension reform legislation, it would undercut the DOL’s negative position.

Why Flexibility is Needed

Facts and circumstances matter. Consider these questions:

·       Does it make a difference if cryptcurrency is offered under a self-directed brokerage window that not everyone will use or to everyone as a plan investment option?

·       Does it make a difference if cryptocurrency is offered without an investment cap or if there is a modest percentage limit, such as 2- 5%, on the portion of an account that may be invested in cryptocurrency?

·       Does it matter if the plan is sponsored by a company in the crypto or financial industries, where presumably employees are knowledgeable about the risk?

·       Does it matter if there is a secure custody arrangement such as cold storage?

·       Should the analysis be different if cryptocurrency is offered through a fund managed by a professional familiar with this type of investment and the participant doesn’t select investments directly?

·       Should it make a difference if the investment is offered through a fund with indirect exposure to the cryptocurrency market, such as a fund that invests in blockchain companies, rather than directly in cryptocurrency?

·       Should it make a difference if participants receive prospectuses or other detailed risk disclosures and sign a release?

All of these situations seem to have been lumped together by the DOL in the CAR. Regardless of whether the DOL prevails against ForUsAll in the pending lawsuit, cryptocurrency is here to stay. Industry participants can help the DOL develop a more nuanced position about cryptocurrency that takes these differences into account if they are given the opportunity.