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Cryptocurrency – An Imprudent 401(k) Investment?

Charles C. Shulman, Esq.

CAR No. 2022-01: Presumption of Imprudence on Cryptocurrency for 401(k) Plans. On March 10, 2022, the Department of Labor (“DOL”) issued Compliance Assistance Release (“CAR”) No. 2022-01, cautioning plan fiduciaries to exercise extreme care before they consider adding a “cryptocurrency” option to a 401(k) plan’s investment menu for plan participants, and if they do add the cryptocurrency option, they should be prepared for a possible DOL investigation. CAR No. 2022-01 noted that when a 401(k) plan offers a menu of investment options to plan participants, the responsible fiduciaries have an obligation to ensure the prudence of “each” options on an ongoing basis.[1]

CAR No. 2022-01 cited the recent Supreme Court case of Hughes v. Northwestern University, 142 S.Ct. 737, 742 (2022), which held that even in a participant directed plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine whether “each” investment should be prudently included in the plan’s menu of options.

CAR No. 2022-01 states that in this early stage in the history of cryptocurrencies, the DOL has serious concerns about the prudence of a fiduciary’s decision to expose 401(k) plan participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies, as these are speculative and volatile investments and they present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss, and also raise custodial and recordkeeping concerns. 

DOL Expecting to Investigate Plans that Offer Cryptocurrency – CAR No. 2022-01 noted that the DOL 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. Plan fiduciaries responsible for overseeing such investment options or allowing such investments through “brokerage windows” should 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, according to CAR No. 2022-01.[2]

Fidelity April 2022 Introduction of a Bitcoin Fund in its Core Lineup of 401(k) Investments – Less than two months after the issuance of CAR No. 2022-01, on April 26, 2022 Fidelity Investments announced that it is adding a digital asset fund holding Bitcoin to their core investment lineup for 401(k) funds (although it had been available under its brokerage account for a number of years), and if agreed to by employers for their individual plans, participants will be able to invest up to 20 percent or more of their 401(k) contributions in the Bitcoin fund. This is certainly not congruous with CAR No. 2022-01. However, a DOL official commented on May 23, 2022 that in his view retirement plans that are clients of financial institutions marketing cryptocurrency products will not automatically be subjected to a Department of Labor audit. Reported in Bloomberg Daily Labor Report (May 24, 2022).

Lawsuit Alleging DOL Had no Authority to Issue These New Rules without Administrative Rulemaking and Review – On June 2, 2022, the DOL was sued by ForUsAll, Inc., which was the first 401(k) platform to provide access to cryptocurrency, in the District Court in Washington, D.C., alleging that the DOL violated the Administrative Procedure Act by issuing new fiduciary rules in CAR No. 2022-01 without following the correct procedures.[3] Perhaps in response to this litigation and other pushback on CAR No. 2022-01.

Surprises in CAR No. 2021 – CAR No. 2022-01 surprised many practitioners for a number of reasons:

1. CAR No. 2022-01 appears extreme in labeling a cybercurrency fund from amongst other diverse 401(k) funds as having a presumption of “imprudence.” Even if cryptocurrency is volatile and speculative, that contributes not only on the downside but also on the upside.

• One would have expected that offering, e.g., a Bitcoin fund as part of a wide variety of diversified funds, and limiting the Bitcoin fund to for example not more than 20% of the account balance, as Fidelity did, should NOT be deemed to be imprudent as a rule or giving rise to an audit for that reason alone. 

• Fidelity’s introduction of the Bitcoin fund as a core investment for 401(k) plans indicates that Fidelity believes CAR No. 2022-01 will be retracted or limited.

• CAR No. 2022-01 also stated that fiduciaries allowing cryptocurrencies in 401(k) plans even if just though “brokerage windows” should expect to be questioned about how they can square their actions with their ERISA fiduciary duties. Many practitioners were surprised with this added statement, because brokerage windows (which have been around for at least 20 years)[4] have been and continue to be offered in many 401(k) plans, and fiduciaries cannot possibly evaluate each trade in the brokerage accounts.[5]

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[1]             DOL EBSA Compliance Assistance Release No. 2022-01 – 401(k) Plan Investments in “Cryptocurrencies” (March 10, 2022), https://tinyurl.com/DOL-2022-01.  

[2]             DOL EBSA Compliance Assistance Release No. 2022-01.

[3]             ForUsAll, Inc. v U.S. Department of Labor and Martin J Walsh Secretary of Labor Complaint, filed with U.S. Dist. Ct. for D.C. (June 2, 2022), resources.forusall.com/Dkt.%20001%20ForUsAll%20Complaint.pdf

[4]           Field Assistance Bulletin No. 2012-02R (July 30, 2012) in FAB No. 39 notes that the DOL does not prohibit the use of a platform or a brokerage window, self-directed brokerage account, or similar plan arrangement in an individual account plan. In 2014 the DOL solicited comments regarding standards for brokerage windows in participant directed account plans, although no regulations were issued to date. On occasion, an employer might have to file a Form S-8 registration statement for employer stock if the stock may be purchased by 401(k) plan participants through a brokerage account window.

[5]               It is true, though, that some plans have shied away from brokerage windows because of the increased investment risk and the inability to monitor the investments.