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Should Crypto Be Allowed in 401(k)s?

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The Department of Labor has issued compliance assistance release No. 2022-01 to warn 401(k) and other responsible plan fiduciaries about allowing participants to invest in either cryptocurrencies or products that are related to and derive their value from virtual currency. The guidance comes in response to President Joe Biden’s executive order that directed various federal agencies to study the risks and benefits of cryptocurrency in anticipation of releasing new cryptocurrency regulations. 

The release warned that in the eyes of the Labor Department, cryptocurrency poses significant risks and challenges for plan participants, including the risk of fraud, theft and loss. The release is clear that plan fiduciaries who allow cryptocurrency investment options should expect to be subject to investigation and face questions about how those decisions could comply with their duties of prudence and loyalty. 

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the Department of Labor’s stance on cryptocurrency in retirement accounts.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: I understand the Department of Labor’s concerns about whether cryptocurrency is an appropriate retirement plan investment option. Cryptocurrency is an extremely volatile and risky investment. I can’t see how any responsible plan fiduciary would be able to justify the risk, given the difficulties associated with inexperienced plan participants being able to properly evaluate the investment option and understand the risks. 

Byrnes: Cryptocurrency is here to stay. Ignoring that does a disservice to clients who may be interested in cryptocurrency investments. Cryptocurrency investments can add diversification to any retirement portfolio and give clients potentially valuable protection from an extreme market downturn like the one most of us experienced only a few short years ago. 

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Bloink: Even experienced investment professionals are challenged when it comes to truly understanding the risk of loss associated with this relatively new investment option. The Supreme Court’s Northwestern decision made it crystal clear that plan fiduciaries can’t satisfy their duties by merely offering a wide array of investment options. Instead, they’re required to evaluate each option to determine whether it’s an appropriate investment choice.

Byrnes: Plan fiduciaries should evaluate virtual currency options in the same way they would any other type of traditional investment when determining whether it’s an appropriate retirement plan asset. The fact is, for some clients, it’s possible that cryptocurrency could be a valuable and appropriate plan asset, and we shouldn’t simply ignore that possibility.

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Bloink: We’re talking about retirement account investment options that are presented to a diverse array of plan participants. Those participants aren’t put through an educational course that details the pros and cons of the virtual currency investment strategy. In other words, they don’t always have all the facts and might assume that the crypto option is an appropriate investment choice for the sole reason that it is presented in their 401(k) investment lineup. I can’t see how that would be sufficient to satisfy a fiduciary’s duty of prudence.

Byrnes: Ignoring the cryptocurrency investment option at the 401(k) level is ignoring reality. Plan participants are interested in these investment options, especially younger participants. Offering the crypto option as a diversified part of the participant’s overall investment lineup might actually encourage younger savers to direct more funds into the tax-preferred retirement plan — because odds are strong that they’d invest in some type of crypto outside of the retirement plan anyway. This way, these participants at least have the benefit of an experienced fiduciary who has reviewed the investment selection.

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