In March 2022, the U.S. Department of Labor issued Compliance Assistance Release No. 2022-01 – 401(k) Plan Investments in “Cryptocurrencies” (Crypto Release).   According to the Crypto Release, certain firms have been marketing cryptocurrencies to 401(k) plans as potential investment options for plan participants. The Department of Labor (DOL) cautions plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan.  The following is a summary of highlights from the Crypto Release.

Under ERISA, fiduciaries must act solely in the financial interests of plan participants and adhere to an exacting standard of professional care. Fiduciaries who breach those duties are personally liable for any losses to the plan resulting from that breach. A fiduciary’s consideration of whether to include an option for participants to invest in cryptocurrencies is subject to these exacting responsibilities.

Fiduciaries have an obligation to ensure the prudence of the investment options and may not shift responsibility to identify and avoid imprudent investment options to plan participants.  The DOL has expressed concerns about a fiduciary’s decision to expose plan participants to investments in crypto currencies for the following reasons:

• Speculative and Volatile Investments: Cryptocurrencies have been subject to extreme price volatility, which may be due to the many uncertainties associated with valuing these assets, speculative conduct, the amount of fictitious trading reported, widely published incidents of theft and fraud, and other factors.
• The Challenge for Plan Participants to Make Informed Investment Decisions: Cryptocurrencies are often promoted as innovative investments that offer investors unique potential for outsized profits. These investments can all too easily attract investments from inexpert plan participants with great expectations of high returns and little appreciation of the risks the investments pose to their retirement investments.
• Custodial and Recordkeeping Concerns: Cryptocurrencies 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. Methods of holding cryptocurrencies can be vulnerable to hackers and theft.
• Valuation Concerns: Experts have fundamental disagreements about important aspects of the cryptocurrency market, noting that none of the proposed models for valuing cryptocurrencies are as sound or academically defensible as traditional discounted cash flow analysis for equities or interest and credit models for debt.
• Evolving Regulatory Environment: Rules and regulations governing the cryptocurrency markets may be evolving, and some market participants may be operating outside of existing regulatory frameworks or not complying with them.

Based on these risks and the nuances of investing in cryptocurrency, the Employee Benefits Security Administration anticipates investigating plans that offer cryptocurrency investment options, and may take action to protect the interests of plan participants. Plan fiduciaries should fully consider cryptocurrency risks before adding a cryptocurrency option to a 401(k) plan’s investment menu.

For more information, please contact Tyler Owen at towen@dopkins.com.

About the Author

Tyler M. Owen CPA CFE

As a member of the Assurance Services team, Tyler provides assurance and consulting services to clients from a diverse group of industries, providing management with critical information to help them improve their organizational fiscal controls