DOL Issues Guidance on Use of Cryptocurrency in 401(k) Plans

On March 10, 2022, the Department of Labor issued guidance on the use of cryptocurrency in plans governed by ERISA.  The announcement applies to cryptocurrencies as well as digital assets, which include “tokens,” “coins,” “crypto assets” and any derivates thereof.

The DOL noted that a fiduciary’s duty under ERISA is the “highest known to the law.”  A fiduciary who breaches those duties is personally liable for any losses to the plan resulting from that breach.  As such, a fiduciary’s consideration of whether to include an option for participants to invest in crypto is subject to these exacting responsibilities.

In defined contribution plans that offer a menu of investment options to plan participants, the responsible fiduciaries have an obligation to ensure the prudence of the options on an ongoing basis.  Fiduciaries cannot shift responsibility to plan participants to identify and avoid imprudent investment options but must evaluate the designated investment alternatives made available to participants and take appropriate measures to ensure that they are prudent. The DOL cited the recent U.S. Supreme Court opinion in Hughes v. Northwestern University, 142 S. Ct. 737, 742 (2022), when it noted, “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 failure to remove imprudent investments is a breach of duty.

According to the March 10th guidance, the DOL has serious concerns about the prudence of a fiduciary’s decision to expose defined contribution plan participants to direct investments in crypto or other products whose value is tied to crypto.  The DOL further indicated that these investments present significant risks and challenges to participants’ accounts including significant risks of fraud, theft, and loss for the following reasons:

  • The SEC has determined that investments in crypto are highly speculative and volatile.
  • It is a challenge for plan participants to make an informed decision.  Participants are likely to be swayed by the potential for outsized profits and they will have little appreciation for the risks.  When plan fiduciaries, charged with the duties of prudence and loyalty, choose to include a crypto option in a plan’s menu, they effectively tell the plan’s participants that knowledgeable investment experts have approved the crypto option as a prudent option for plan participants.  This can easily lead plan participants astray and cause losses.
  • Crypto 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.  Some crypto can be lost simply by forgetting the password.  Other methods can be vulnerable to hackers and theft.
  • There is concern regarding the reliability and accuracy of crypto valuations.  Experts have fundamental disagreements about important aspects of the market and there are no models for valuing crypto that are sound.  Moreover, crypto market intermediaries may not adopt consistent accounting treatment.
  • Rules and regulations governing the crypto markets are evolving and some market participants may be operating outside of existing regulatory frameworks or not complying with them.  Fiduciaries who consider whether to include a crypto investment option will have to include in their analysis how regulatory requirements may apply to issuance, investments, trading, or other activities and those regulatory requirements might affect investments by participants in retirement plans.

The DOL concluded its guidance by stating the following:

Based on these and other concerns, [the Employee Benefits Security Administration] expects to conduct an investigative program aimed at 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 these 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 in light of the risks described above.

In essence, the DOL is putting plan sponsors on notice that they will be watching.  As a result, 401k plans should proceed with caution in evaluating whether to incorporate crypto as a plan investment. 

We have sounded a similarly cautious note when it comes to paying employee wages with crypto. In addition, the Biden administration has issued an Executive Order on Ensuring Responsible Development of Digital Assets.  According to a White House Fact Sheet, this order outlines "the first ever, whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.”

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.