When the DOL issued its Compliance Assistance Release (CAR) 2022-01 in March, it aroused a hornet’s nest. Plan sponsors and vendors were beginning to respond to demand from participants wanting to invest in Bitcoin and other cryptocurrencies through their 401(k) plans. A couple of providers, including vendor Forusall, had already made crypto available to participants subject to a cap on the percentage of assets they could invest. Shortly after the CAR was issued, Fidelity announced that it would be making Bitcoin available to plan sponsors as a plan menu option.
Impact of the CAR
However, the CAR seems to make crypto investments presumptively imprudent, applies to an amorphous group of related investments, and also reverses the longstanding understanding of plan fiduciaries that they did not have to vet each investment option available under a brokerage window so long as they prudently selected the vendor.
Lack of Industry Input
This was subregulatory guidance not subject to the procedures required for more formal guidance, and was issued in a form that did not make it subject to public comment. However, leading industry figures have now provided valid comments about the overly simplistic view of crypto investments taken in the CAR, including in letters they have sent to the DOL.
Need for Focused Guidance
It would be in the interest of everyone involved, including the DOL, for more focused guidance to be issued dealing at minimum with the following issues:
We have never had a list of prohibited types of investments under ERISA. The DOL should make clear that crypto investments are not prohibited or presumptively imprudent and delay implementation of its announced program of targeting plans with crypto investments for investigation.
Changes to positions on issues such as fiduciary responsibilities for brokerage window investments should be made for general policy reasons and not simply to target one class of potential plan investments.
There are many different forms of investing in crypto and they vary widely in their risk profiles. The CAR purports to cover not only direct crypto investments, but derivatives, investments “whose value is tied to cryptocurrency” and “related investments”. These phrases are so vague that it is not even clear which investments the DOL is warning about. For example, there is an ETF Fund that invests in crypto futures, and there are ETF crypto index funds, all of which have daily trading and provide investors with prospectuses warning about the risks. There are funds that invest in service providers in the crypto market, such as data services, or that invest in blockchain companies. There are target date funds managed by experts with crypto exposure that could become problematic under this guidance. We need the DOL to clarify the scope of the CAR and acknowledge that there is a difference between trading by individual participants and funds managed by investment experts.
Cryptocurrency is here to stay and the DOL will not be able to avoid dealing with it in the longer term. When the DOL provided guidance on nontraditional plan investments such as futures contracts in the past, or was considering exemptions that permitted plans to invest in swaps, it obtained information from industry participants and became educated about how these investments work. By all accounts, that has not happened here, and a dialogue needs to be opened.
There will be a significant group of plan fiduciaries who believe that cryptocurrently is currently too risky to be a retirement plan investment. While that is a reasonable and cautious position, there are experts who also reasonably believe that, subject to limits, cryptocurrency investments can be a helpful way to diversify a retirement portfolio. The type of business in which the plan sponsor is engaged and the sophistication of participants regarding investment matters may also be appropriate factors for plan fiduciaries to consider when evaluating cryptocurrency investments. The DOL needs to provide guidance on what fiduciaries should consider in making prudent determinations about the availability of crypto in their plans, rather than simply targeting them for investigation. For example, the DOL flags custody issues in the CAR, but there is a type of custody called cold storage under which assets are held offline and participants get a private key to access their accounts. This is intended to deter hacking and eliminate the risk of losing an investment because a password is lost. With more information, the DOL could issue guidance explaining how fiduciaries should check to see whether the custody risk is controlled.
It is not too late for the DOL to engage with stakeholders on these issues and provide appropriate guidance to plan fiduciaries.