DOL Releases Cautionary Guidance on Crypto in Retirement Plans

Cryptocurrencies have been promoted and have garnered significant attention in recent years as innovative investments that offer unique potential for outsized profits, but it’s the opinion of the Department of Labor (DOL) and many investment professionals that the potential pitfalls associated with these investments are not widely understood or appreciated by investors.

On March 10, the DOL’s Employee Benefit Security Administration (EBSA) published Compliance Assistance Release 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.”

This guidance should serve as a stark reminder to plan fiduciaries – those individuals responsible for overseeing the menu of investments that are made available to plan participants – of their responsibilities under ERISA. Fiduciaries have an ongoing obligation to ensure the prudence of the investment options in their plans, and must do so with the care, skill and diligence of a prudent expert familiar with such matters would exercise in similar circumstances. Fiduciaries found to have breached their duties by offering imprudent investments are personally liable for any losses to the plan, and cryptocurrency investments are no exception.

The guidance further states that cryptocurrencies, or other investment products whose value is tied to cryptocurrencies, present significant risks and challenges to plan participants’ retirement accounts – including the threat of fraud, theft and loss – for the following reasons:

  • Speculative and Volatile Investments – Cryptocurrencies have been subject to extreme price volatility, which may be due to the many uncertainties associated with valuing these assets, speculative conduct and widely published instances of theft or fraud;
  • The Challenges for Plan Participants to Make Informed Investment Decisions – Participants are less likely to have sufficient knowledge about these investments, as compared to traditional opportunities, or to have the technical expertise necessary to make informed decisions about investing in them;
  • Custodial and Recordkeeping Concerns – Cryptocurrencies are not held in trust or custodial accounts like traditional investments, meaning they might not be valued regularly and available to pay benefits and plan expenses;
  • Valuation Concerns – Experts note that none of the proposed models for valuing cryptocurrencies are as sound or academically defensible as traditional discounted cash flow analysis for equities or similar models for debt; and
  • Evolving Regulatory Environment – Rules and regulations governing the cryptocurrency markets may be evolving, and some investors may be operating outside of the existing regulatory framework or not complying with it at all.

Based on these and other concerns, the EBSA expects to conduct an investigation focused on plans that make cryptocurrency investments available to their participants. Any fiduciaries that make these investments available in their plans should expect questioning surrounding the prudent evaluation process that was deployed (hint - it’ll be difficult, if not impossible, to present a defensible case, especially in light of the latest guidance).

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as investment, tax or legal advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary.  Therefore, the information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.

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