Cryptocurrency – Fiduciaries to Decide if it is a Prudent 401(k) Investment
By Charles C. Shulman, Esq.
1. Under Biden Administration – Presumption of Imprudence of Cryptocurrency Fund for 401(k) Plans
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]
Fidelity and Others Offer Crypto 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, 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.
Lawsuit Alleging DOL Had no Authority to Issue These New Rules without Administrative Rulemaking and Review was Dismissed – A 2022 lawsuit against the DOL by ForUsAll, Inc., which was the first 401(k) platform to provide access to cryptocurrency, alleged that the DOL violated the Administrative Procedure Act by issuing new fiduciary rules in CAR No. 2022-01 without following the correct procedures. In 2023, in ForUsAll, Inc. v. U.S. Dept. of Labor, 691 F.Supp.3d 14 (2023) granted the Department of Labor’s motion to dismiss this lawsuit, since the DOL’s guidance was not a final agency action subject to judicial review and that ForUsAll failed to allege a specific injury and lacked the legal standing to sue.
Surprises in CAR No. 2021 – CAR No. 2022-01 surprised many practitioners for a number of reasons: (i) CAR No. 2022-01 appears extreme in labeling a cybercurrency fund from amongst other diverse 401(k) funds as having a presumption of “imprudence” and even if cryptocurrency is volatile and speculative, that contributes not only on the downside but also on the upside; (ii) 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; (iii) 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, and many practitioners were surprised with this added statement, because brokerage windows have been and continue to be offered in many 401(k) plans, and fiduciaries cannot possibly evaluate each trade in the brokerage accounts.
2. Under Trump Administration – Neutral Position for Cryptocurrency Fund for 401(k) Plans – Fiduciary Decision
The Trump Department of Labor on March 28, 2025 issued DOL Compliance Assistance Release No. 2025-01 – 401(k) Plan Investments in “Cryptocurrencies”- which rescinds CAR No. 2022-01 in full.
CAR No. 2025-01 noted that CAR No. 2022-01 directed plan fiduciaries to exercise “extreme care” before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants, but as CAR 2025-01 notes, the standard of “extreme care” is not found in ERISA and differs from ordinary ERISA fiduciary principles.
CAR No. 2025-01 noted that the recission of the 2022 release restores the DOL’s longstanding approach of taking a neutral approach to particular investment types and strategies, by neither endorsing, nor disapproving of, plan fiduciaries who conclude that the inclusion of cryptocurrency in a plan’s investment fund alternative is appropriate. When evaluating any particular investment type, a plan fiduciary’s decision should consider all relevant facts and circumstances and will necessarily be context specific, as noted in the 2014 Supreme Court decision of Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409.
As noted by Secretary of Labor Lori Chavez-DeRemer, the Biden administration’s department of labor made a choice to put their thumb on the scale, and the new guidance is rolling back this overreach and making it clear that investment decisions should be made by fiduciaries, not D.C. bureaucrats.
3. Points to Consider
- Currently, a very small percentage of 401(k) plans offer alternative investments such as cryptocurrency. CAR No. 2025-01 is likely to open up cryptocurrency and similar investments to a larger portion of 401(k) plans. This is likely to happen quickly for large plan providers, as many of them have already been planning for this outcome.
- The 401(k) plan fiduciaries will still have to study whether crypto assets are a prudent investment options for the retirement plan, and they should “document” the decision-making process. If the crypto investment is offered, the risks of such investments should be specified in the participant fee disclosure notice.
[1] DOL EBSA Compliance Assistance Release No. 2022-01 – 401(k) Plan Investments in “Cryptocurrencies” (March 10, 2022), https://tinyurl.com/DOL-2022-01. 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. 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.
