DOL Cautions Plan Fiduciaries on Cryptocurrency Risks, Urges “Extreme Care"

Recently, the Department of Labor (DOL) issued new guidance regarding 401(k) retirement plans that offer, or are considering offering, investments in cryptocurrency-based investment options in their plan menu. In Compliance Assistance Release 2022-01 (March 10, 2022), the DOL expresses “serious concerns about the prudence of a fiduciary’s decision to expose 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies.” The DOL also warns that plan fiduciaries should “expect to be questioned” (i.e., investigated) if they do so. Concerns cited by the Department include:

• speculative and volatile nature of crypto investing;
• challenges to informed participant decision-making;
• custodial risks and recordkeeping issues;
• valuation questions;
• the absence of well-developed cryptocurrency regulations.

Brokerage Windows

The DOL also included a warning to plan sponsors with respect to the availability of cryptocurrency related windows through self-directed brokerage windows. That portion of DOL guidance has been especially controversial, given that self-directed brokerage windows and the investments made available through them are not “designated investment alternatives.” Prior DOL guidance had characterized brokerage window providers as plan service providers, subject to fiduciary oversight for reasonableness of fees and quality of services. The DOL’s new cryptocurrency guidance calls into question whether that view may be shifting, and whether the DOL may take the view that allowing certain types of investing through the brokerage window may also implicate the duty of prudence.

ERISA’s duty of prudence requires appropriate consideration of facts and circumstances that a fiduciary knows or should know are relevant to an investment, including whether a particular investment furthers the purposes of the plan taking into account the risk of loss and opportunity for gain. The Compliance Assistance Release’s emphasis on the risks associated with cryptocurrency and failure to identify any offsetting benefits sends a strong signal that the DOL is likely to view decisions to make cryptocurrency-based investments available through 401(k) plans as imprudent. 

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