On March 10, 2022, the USA Division of Labor (DOL) printed Compliance Assistance Release No. 2022-01 (Launch) addressing “cryptocurrency” funding in 401(ok) retirement plans. In its Launch, the DOL expressed vital warning to plan fiduciaries who’re contemplating providing cryptocurrency funding choices of their retirement plans, noting main issues over whether or not providing such investments are prudent and in furtherance of their fiduciary duties underneath the Worker Retirement Earnings Safety Act of 1974, as amended (ERISA). The DOL additional warns of future investigation of retirement plans that supply participant investments in cryptocurrencies – together with allowing such funding via brokerage home windows.
Beneath ERISA, retirement plan fiduciaries are required to behave solely in the very best curiosity of plan contributors and beneficiaries. With respect to outlined contribution retirement plans, equivalent to a 401(ok) plan, account worth is essentially dictated by worker contributions and the return on funding of these contributions. To that finish, fiduciaries have an ongoing responsibility to make sure solely prudent funding choices are supplied underneath the plan – requiring each preliminary and recurring unbiased evaluations of all plan funding choices to find out if they’re, and stay, prudent choices. Within the occasion of a breach of fiduciary responsibility, plan fiduciaries could discover themselves personally chargeable for losses stemming from their imprudent conduct.
The DOL listed quite a few issues relating to the prudence of cryptocurrency investments in retirement plans, together with their speculative and risky nature, difficulties in valuation (even for knowledgeable traders), custodial and recordkeeping issues (noting that cryptocurrency is just not held in belief/custodial accounts, however are code held in a digital pockets, and as such, accounts will be utterly vanish within the occasion of misplaced passwords or cyber-attacks), and an absence of a regulatory framework, doubtlessly leading to illegal gross sales via unregistered transactions.
Though the Launch centered on cryptocurrencies (or every other funding merchandise tied to cryptocurrencies), the DOL famous that the identical reasoning and rules could be relevant to a broad vary of digital property, together with however not restricted to tokens, cash, crypto property, and any derivatives thereof.
The Launch offered quite a few substantial takeaways for plan fiduciaries.
First, the DOL implied that cryptocurrency will mechanically be deemed as an imprudent plan funding, representing maybe the primary time the DOL has drawn such a broad conclusion on a selected type of plan funding. There isn’t a statutory authority for the DOL to attract this conclusion, as ERISA doesn’t particularly allow an asset class to be de facto imprudent.
Second, and maybe most notably, the DOL additional cautions that it’s going to query plan fiduciaries in regards to the prudence of allowing entry to cryptocurrencies via brokerage home windows. Historically, brokerage home windows provide contributors entry to purchase and promote securities via their 401(ok) plan account through a brokerage platform – availing themselves to a a lot bigger vary of investments than supplied via the plan’s core funding fund lineup. Traditionally, the DOL has not investigated brokerage home windows, seemingly permitting fiduciaries to keep away from legal responsibility for poor funding choices made by contributors. Nonetheless, the choice to supply a brokerage window is seen as a fiduciary choice, and by requiring fiduciaries to think about cryptocurrency transactions executed via brokerage home windows, the DOL has vastly expanded the scope of the responsibility to watch.
Despite the fact that packaged as cryptocurrency steering, the DOL’s place on this matter could have far broader software – opening the door for evaluation of all plan investments made via brokerage home windows. In consequence, plan fiduciaries have to query whether or not they’re fiduciarily chargeable for any transaction made via a brokerage window, not simply cryptocurrency transactions. Given the possibly vital variety of funding transactions made through a brokerage window, it could be unreasonable to anticipate fiduciaries to watch all of them. Whereas it isn’t but clear how this situation will play out sooner or later, plans at the moment providing brokerage home windows, or these contemplating including them to their accounts, ought to rigorously consider the potential fiduciary implications related to such preparations.
The DOL has suggested that it anticipates investigating plans providing cryptocurrency as an funding possibility of their retirement plan lineup, searching for the idea upon which plan fiduciaries decided such investments to be prudent. Given the DOL’s sturdy stance in opposition to cryptocurrency investments, in addition to this heightened degree of scrutiny, plan fiduciaries must be cautious when deciding whether or not to supply cryptocurrency as a plan funding possibility. If cryptocurrency is obtainable as an funding possibility, plan fiduciaries ought to doc the the reason why the funding was thought of an acceptable plan funding and be ready to answer the DOL’s questions regarding its prudence.
Additional, plan fiduciaries who provide entry to a brokerage window (or are contemplating including one) ought to monitor additional updates from the DOL and rethink whether or not the brokerage window stays a prudent choice, and if they should rethink how they monitor transactions made via them.