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On March 10, the DOL issued Compliance Assistance Release No. 2022-01 expressing skepticism about the prudence of offering cryptocurrency investment options within ERISA plans. So, can plan fiduciaries include cryptocurrencies without violating their fiduciary duties? The DOL didn’t foreclose the possibility, but has its doubts.
The release advises plan fiduciaries to approach decisions about adding cryptocurrency options with tremendous caution and notes that DOL has “serious concerns” about plans providing such investment options to plan participants. Referencing the recent Hughes v. Northwestern University Supreme Court case, the DOL notes that plan fiduciaries may not simply delegate responsibility to plan participants to select prudent investments among the plan’s options—rather plan fiduciaries must ensure that all plan investment options are prudent and appropriately selected and monitored, including cryptocurrency options.
The DOL then takes the position that cryptocurrency investments (whether directly invested or more indirectly invested in products whose value is linked to crypto currencies) present significant risks to participant retirement accounts for the following reasons:
1. Speculative and Volatile: The release casts crypto currencies as volatile investments and notes that the SEC has described cryptocurrency investments as “highly speculative.”
2. Challenge for Plan Participants to Make Informed Investment Decisions: Because of the unique nature of cryptocurrencies, it can be extremely difficult to measure value and evaluate risk. Adding cryptocurrencies to a plan’s investment menu may be seen as tacit endorsement—
”that knowledgeable investment experts have approved the cryptocurrency option as a prudent option for plan participants.”
3. Custodial and Recordkeeping Concerns: Crypto currency access and management can present new challenges — methods of “holding” an investment differ here from more traditional retirement assets, making recordkeeping (and even proof of ownership) more difficult to maintain.
4. Valuation Concerns: Valuation of cryptocurrencies is often difficult and variable.
5. Evolving Regulatory Environment: Cryptocurrencies are more likely to be unregulated and some have been used in illegal activity, which can potentially widen the scope of liability.
Finally, the DOL concludes by saying that plan fiduciaries who offer cryptocurrency investment options (including through brokerage windows) should expect to be questioned on how the fiduciary determined the investment was prudent and in the best interests of participants and beneficiaries in light of the risks identified above. An ominous warning, for sure.
Thus, while the DOL did not outright prohibit cryptocurrency investments, plan fiduciaries who offer cryptocurrency investment options (even if only through brokerage windows) may want to perform additional analysis and carefully document that decision, specifically addressing and documenting an analysis of the risks identified above. Reach out to your TPA and plan advisor to learn more.