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 important 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 Revenue 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 by brokerage home windows.
Underneath ERISA, retirement plan fiduciaries are required to behave solely in the most effective curiosity of plan members 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 obligation to make sure solely prudent funding choices are provided 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 obligation, plan fiduciaries might discover themselves personally accountable for losses stemming from their imprudent conduct.
The DOL listed quite a lot of issues concerning the prudence of cryptocurrency investments in retirement plans, together with their speculative and risky nature, difficulties in valuation (even for professional buyers), custodial and recordkeeping issues (noting that cryptocurrency just isn’t held in belief/custodial accounts, however are code held in a digital pockets, and as such, accounts may be fully vanish within the occasion of misplaced passwords or cyber-attacks), and an absence of a regulatory framework, probably leading to illegal gross sales by 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 can 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 lot of substantial takeaways for plan fiduciaries.
First, the DOL implied that cryptocurrency will routinely 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’ll query plan fiduciaries concerning the prudence of allowing entry to cryptocurrencies by brokerage home windows. Historically, brokerage home windows supply members entry to purchase and promote securities by their 401(ok) plan account by way of a brokerage platform – availing themselves to a a lot bigger vary of investments than provided by 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 members. Nevertheless, the choice to supply a brokerage window is seen as a fiduciary choice, and by requiring fiduciaries to think about cryptocurrency transactions executed by brokerage home windows, the DOL has vastly expanded the scope of the obligation to observe.
Despite the fact that packaged as cryptocurrency steerage, the DOL’s place on this matter might have far broader utility – opening the door for evaluation of all plan investments made by brokerage home windows. Because of this, plan fiduciaries must query whether or not they’re fiduciarily accountable for any transaction made by a brokerage window, not simply cryptocurrency transactions. Given the possibly important variety of funding transactions made by way of a brokerage window, it will be unreasonable to anticipate fiduciaries to observe all of them. Whereas it isn’t but clear how this difficulty will play out sooner or later, plans at present 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 choice of their retirement plan lineup, in search of 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 choice. If cryptocurrency is obtainable as an funding choice, plan fiduciaries ought to doc the explanation why the funding was thought-about an applicable plan funding and be ready to answer the DOL’s questions regarding its prudence.
Additional, plan fiduciaries who supply 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 by them.