On March 10, 2022, the DOL issued sub-regulatory guidance in the form of a “Compliance Assistance Release” that essentially cautions against offering cryptocurrencies directly or through brokerage windows as potential investment options for 401(k) plan participants. The DOL’s guidance has generated industry backlash amid an environment focused on continued growth of crypto investments. In fact, the DOL’s guidance and warnings starkly contradict industry ads touting the virtues of crypto investments in retirement plans and strategies.
Nearly all 401(k) plans offer participant-directed investments, allowing participants to direct their retirement plan savings amongst the options made available under the plan. There’s no “one size fits all” when it comes to the appropriate investment lineups offered under 401(k) plans. Plans range widely in terms of the number and types of investment options made available. ERISA lays the groundwork in terms of mandating that plan fiduciaries meet certain standards, including discharging their duties with the care, skill, prudence and diligence that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character and aims. This is often referred to as the “prudent person” standard. Given that participant demographics vary widely across organizations based on factors like age, tenure, education, disposable income and investment savvy, plan fiduciaries grapple with setting the “right” investment platform for their particular participants and beneficiaries.
The DOL’s cryptocurrency guidance cites the Supreme Court’s recent decision in Hughes v. Northwestern University, stating that “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.” This guidance reiterates that plan fiduciaries must do the hard work (and perhaps seek expert advice from investment advisors or managers under ERISA sections 3(21) and 3(38)).
Plan fiduciaries, particularly in crypto-focused organizations, fintech or other businesses with participants seeking “cutting edge” growth and non-traditional diversification strategies, may be enticed to offer cryptocurrency investments – either directly or through a brokerage window. In 401(k) plans, a brokerage window allows participants to buy and sell securities through a brokerage platform, which permits participants to invest in a far wider range of investments than the typical menu of limited mutual funds offered by plans directly.
While the DOL’s guidance falls short of a ban on offering cryptocurrency, the recent guidance may cause plan fiduciaries to second guess that approach. In the guidance, the DOL cautions plan fiduciaries to “exercise extreme care” before they consider adding a cryptocurrency option to a 401(k) plan's investment menu for plan participants, pointing to the fact that investment in cryptocurrency is highly speculative and subject to extreme price volatility.
Moreover, the DOL announced that it 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.” Again, the DOL will be investigating against the backdrop of the “prudent person” standard. What this means is that plan fiduciaries responsible for overseeing crypto investments or allowing such investments through brokerage windows should, as the DOL puts it, “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 the wake of the DOL’s guidance plan fiduciaries that already directly offer or contemplate directly offering crypto investments believing them to be in line with other plans in similar industries, peer groups or with similar participant demographics should carefully consider the fiduciary and liability implications such an offering may have under DOL audit or participant lawsuit scenarios. Fundamental to this consideration will be assessments of the duties of prudence, loyalty and diversification. Likewise, plan fiduciaries with brokerage windows in their plans should first determine whether those windows currently permit crypto investments and whether any participants already have crypto investments unbeknownst to the plan fiduciaries.
In either case, where plan fiduciaries are determined to offer crypto investments, these plan fiduciaries should assess whether any appropriate “guardrails” can be established to allay the concerns of the DOL. This may involve squaring all governing plan instruments like the plan document and investment policy statement, ensuring that participant disclosures are thorough, setting investment limits if possible, and confirming their fiduciary liability insurance covers crypto investment claims. Interestingly, on this latter point, fiduciary liability insurers’ renewal questionnaires are starting to ask about the availability of crypto investments. If the underwriting for crypto investments becomes too costly or nonexistent, some plan fiduciaries may decide that their experiment with crypto investments is over.
With the continued and increasing presence of crypto investments and a growing industry looking to support more crypto investing, this round of DOL guidance certainly won’t be the end of the discussion.