Department of Labor Position on Cryptocurrency Investments in 401(k) Plans

Many 401(k) plan sponsors mistakenly believe that they are not responsible for the investment fund options available to participants in basic investment menus and self-directed brokerage accounts. In addition, many plan trustees mistakenly believe that they have delegated investment fund selection and responsibility for ongoing performance monitoring to their investment advisor. But in reality, regulatory investigations and member lawsuits are brought against employers and plan trustees for, among other reasons, reckless investment options; courts and regulators have routinely held plan sponsors accountable to reinstate member accounts [see 401(k) Lawsuits: The Causes and Consequences, The Center for Retirement Research at Boston College, May 2018].

Participants ignore questionable practices when markets rise and regularly review fund performance when markets fall. But class action lawyers rarely ignore questionable 401(k) plan practices.

Department of Labor (DOL) investigations and Employee Retirement Income Security Act (ERISA) litigation require plan trustees to demonstrate that they have exercised due diligence and consistently applied the investment policy when selecting and maintaining investment fund alternatives in their participant-directed investment menus and brokerage accounts. .

Plan trustees must ask the appropriate questions, perform due diligence, monitor fund performance, review peer group analysis, and take the necessary steps to protect plan participants in order to meet their duties of care and loyalty. Regulatory investigations and class action lawsuits create reputational risk, monetary damages and operational penalties.

The DOL recently issued a statement urging plan trustees to exercise extreme caution before adding a cryptocurrency option to their 401(k) plan investment menus (see Compliance Assistance Release 2022-01, 401(k) plan investments in “Cryptocurrencies,(United States Department of Labor, Benefits Security Administration, March 10, 2022). The DOL intends to investigate plans that offer participant-directed investments in cryptocurrencies, question plan trustees about their fund selection process, and take steps to protect participants.

Plan Trustees who have breached their duty of care will be personally liable for any loss resulting from such breach, according to the following principles:

  • The responsible plan trustees have an obligation to ensure that the investment options made available to members are prudent at the time of their selection and on an ongoing basis.
  • The Trustees cannot shift responsibility to Participants to identify and avoid imprudent investments available in an investment menu or brokerage account.
  • Trustees must evaluate the investment options available to participants and ensure that those investment options are and remain prudent.
  • Trustees are required to conduct their own independent assessment to determine which investments can be prudently included in their plan’s menu of investment options, even if participants are directing investment from their plan accounts. [see Hughes v. Northwestern University, 142 S. Ct. 737, 742 (2022)]. Trustees who make cryptocurrency available in an investment menu or brokerage account are, in effect, telling participants that experts have approved the option as conservative.
  • SEC staff have warned that investing in cryptocurrency, including the wide range of digital assets, is highly speculative (see Spotlight on Initial Coin Offerings and Digital Assets I, https://www.investor.gov/additional-resources/spotlight/spotlight-initial-coin-offerings-and-digital-assets).
  • Cryptocurrency investments present significant risks of fraud, theft and loss, and may be restricted by law enforcement (see Financial Trend Analysis, https://bit.ly/3w9QTnbnoting ransomware payments made in bitcoin).
  • Trustees can expect to answer questions and document requests regarding their fund selection and investment policy as part of a cryptocurrency investment investigation into a 401(k) plan.

Considering the above, it would appear that cryptocurrency is not a prudent investment alternative for a 401(k) plan at this time. As a result, 401(k) plan sponsors and their pension plan committees are advised not to add cryptocurrency to their investment menus. If it has already been added, plan trustees are advised to remove these investments given the current regulatory situation.

Trustees of 401(k) plans must take their duties of responsible fund selection and responsible stewardship seriously.

Sheldon M. Geller, JD, CPA, is President and Managing Member of Stone Hill Fiduciary Management, LLC, Great Neck, NY, and a member of the Editorial Advisory Board of the CPA Journal.

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