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DOL Warns About Use of Crypto in 401(k)s, Releases Guidance

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What You Need to Know

  • Labor cautions plan fiduciaries to exercise extreme care before considering cryptocurrency as a 401(k) plan option.
  • Financial services firms have begun marketing investments in crypto as potential investment options for 401(k) participants.
  • Labor has serious concerns about exposing participants to direct investment in cryptocurrencies.

The Labor Department on Thursday warned 401(k) plan fiduciaries to “exercise extreme care” before including direct investment options in cryptocurrency and published compliance assistance.

Labor’s Employee Benefits Security Administration released Compliance Assistance Release No. 2022-01, which 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.

“As of 2019, private pension plans held an estimated $6.2 trillion on behalf of about 91 million defined contribution 401(k) plan participants,” Labor said.

The Employee Retirement Income Security Act requires “plan fiduciaries to act solely in the financial interests of plan participants and adhere to the standards of professional care in considering investment options for participants in 401(k) plans,” the announcement states.

Ali Khawar, EBSA’s acting assistant secretary, said the compliance guidance “reminds plan fiduciaries of their important role in selecting investment options for 401(k) plan menus. At this stage of cryptocurrency’s development, fiduciaries must exercise extreme care before including direct investment options in cryptocurrency.”

Labor’s guidance lists the following concerns with cryptocurrencies:

Speculative and volatile investments: The Securities and Exchange Commission has cautioned that investment in a cryptocurrency is highly speculative. At this stage in their development, cryptocurrencies have been subject to extreme price volatility.

Challenge for plan participants to make informed investment decisions: Cryptocurrencies are often promoted as innovative investments that offer investors unique potential for outsized profits.

Custodial and record-keeping 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.

Valuation concerns: The Department of Labor is concerned about the reliability and accuracy of cryptocurrency valuations. Experts have described the question of how to appropriately value cryptocurrencies as complex and challenging.

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.

Khawar said Thursday in a blog post that in recent months, “some financial services firms have begun marketing investments in cryptocurrencies as potential investment options for participants in 401(k)s. At this early stage in the history of cryptocurrencies, however, the U.S. Department of Labor has serious concerns about plans’ decisions to expose participants to direct investments in cryptocurrencies or related products, such as NFTs, coins, and crypto assets.”

President Joe Biden’s recent executive order on ensuring responsible development of digital assets, Khawar continued, “highlights the significant financial risks digital assets can pose to consumers, investors and businesses in the absence of appropriate protections.  Cryptocurrency has gained mainstream popularity and notoriety, but there is still great uncertainty about how the market will develop, and little agreement on investing fundamentals relating to cryptocurrency.”


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