Directly on the heels of the Biden Administration’s digital asset Executive Order issued on March 9, 2022^[1] (Executive Order), the U.S. Department of Labor (DOL) published its own guidance on the use of cryptocurrencies as a 401(k) plan investment in Compliance Assistance Release No. 2022-01 (CAR).   The DOL guidance is not limited to crypto, but advises plan fiduciaries regarding all digital assets, including Ethereum, tokens, and other derivations thereof.

Ominous Warning – Duty of Prudence & Personal Liability at Stake

The DOL CAR is nothing short of an ominous warning for plan fiduciaries.  Similar to the Executive Order, the DOL CAR highlights that there are many risks involved when offering cryptocurrencies or other digital assets as plan investment options.  In light of these risks, the DOL CAR “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.”

The DOL CAR reminds plan fiduciaries of their obligations under Section 404 of  the Employee Retirement Income Security Act of 1974 (ERISA) when assessing crypto or digital asset investments stating that retirement plan fiduciaries must act solely in the financial interest of plan participants, and the duty of prudence and loyalty obligations are the highest known to the law.  It further reminds fiduciaries of their obligations associated with retirement plan investments and the potential for personal liability for plan losses if they breach these fiduciary liabilities.  Again, by restating ERISA’s fiduciary duties and the liability associated with any breach of such duties, the DOL CAR appears to be flashing red light warning signs that any retirement plan fiduciary that dares enter the digital asset realm and pushes forward a crypto retirement plan investment could be subject to the most severe consequences under ERISA.

Duty of Ongoing Monitoring

The DOL CAR very timely applies the recent Supreme Court holding on retirement plan investments in Hughes v. Northwestern and Tibble v. Edison by reiterating that the duty of prudence does not merely include selecting investments, but also extends to the duty to monitor the investments selected on an ongoing basis; any failure to remove an imprudent investment option is a breach of such duty.^[2]

Serious Concerns around Crypto Investing

Keeping on point with the Administration’s Executive Order, the DOL CAR further warns that because cryptocurrency is in its nascent stages, the DOL “has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies,” or any other similar investment products.  The DOL believes that any such investment poses significant risks to participants’ accounts, including risks of fraud, theft, and loss.

In particular, the DOL highlights the following areas of concern for retirement plan fiduciaries:

1. Investments in cryptocurrencies are highly speculative due to the extreme pricing volatility caused by the uncertainties associated with crypto valuations, according to the Securities and Exchange Commission.

2. Cryptocurrencies are capable of being promoted and attracting plan participants with little knowledge of investing who expect high investment returns but have insufficient knowledge of the potential downside related to such highly volatile crypto investments.

3. There are significant custodial and recordkeeping concerns, as the loss of a password could result in the complete loss of a cryptocurrency asset.

4. Cryptocurrencies carry a risk of unreliable valuation, with inconsistent accounting treatment.

5. Cryptocurrencies may impose a regulatory burden since the cryptocurrency markets are evolving, and including cryptocurrencies as 401(k) investment options would expose plan fiduciaries to the potential liability of entering into unlawful transactions with inadequate disclosures for participants.

The DOL CAR concludes by stating that its employee benefits arm, the Employee Benefits Security Administration (EBSA) will conduct an investigative program directly aimed at plans that offer crypto and other digital asset investment.  As part of the investigative program, the EBSA will take appropriate action to protect the interest of plan participants, including the questioning of plan fiduciaries who include such investment options through brokerage windows as to how they “square their action with their duties of prudence and loyalty.”

ENDNOTES

[1] Exec. Order on Ensuring Responsible Development of Digital Assets (March 9, 2022), https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/.

[2] Hughes v. Northwestern Univ., 142 S. Ct. 737, 742 (2022); Tibble v. Edison Int’l, 575 U.S. 523, 530 (2015).