No one would be surprised if cryptocurrency investors applauded Fidelity’s decision to offer the cryptocurrency in 401(k), and while that may not be the case with all plaintiffs’ attorneys, at less some Plaintiffs’ attorneys, accustomed to suing plan sponsors for excessive fees, may well have applauded the emergence of a new avenue of litigation to pursue.
And the DLO? His recent concerns about this cannot be ignored, at least because they could signal a new area of focus for the audit.
For perspective on the fiduciary assurance side, we turned to Wendy Von Wald, fiduciary liability product manager at Travelers.
BenefitsPRO: Why did the US Department of Labor recently issue a warning about cryptocurrency and 401(k) pension plans?
Wendy Von Wald: Due to the uncertainty and volatility that comes with cryptocurrency, the Department of Labor wanted to remind trustees and plan advisors of their obligations. Under the Employees Retirement Income Security Act of 1974 (ERISA), trustees must act in the best interests of plan participants. Choosing to invest in something like cryptocurrency that has presented a significant risk of theft, fraud, and loss could be seen as a breach of fiduciary duty. This warning that the Department of Labor sent out—Compliance Assistance Release #2022-01 is worded quite strongly—explains why a 401(k) retirement plan is not appropriate for this type of investment.
What impact does the Ministry of Labor warning have on trustees or plan advisors?
If the warning is heeded, it will likely result in fewer trustees and plan advisors adding cryptocurrency to their 401(k) investment offerings. This is what the Department of Labor wants right now, because of five main areas of concern:
- Speculative and Volatile Investments: Investment volatility can have a negative impact on plan participants, especially those approaching retirement.
- Make informed decisions: The complexity of the thousands of cryptocurrencies that exist makes it difficult for trustees to value these assets.
- Record-keeping issues: Unlike most other plan assets, cryptocurrency is often made up of lines of computer code placed in a virtual wallet. This exposes you to the risk of loss or theft.
- Valuation issues: How to accurately value cryptocurrency is proving to be a challenge, with experts disagreeing on certain aspects of the market.
- Changing regulatory environment: It can be difficult for plan sponsors to ensure that cryptocurrency transactions are legal, as participants may operate outside of regulations, and those regulations are changing.
What might be the penalties or penalties if plan advisors or trustees offered cryptocurrency as a 401(k) investment choice?
The Department of Labor expects it to have a program to investigate plans that offer cryptocurrency investments to 401(k) plans either as direct investment options or through a window brokerage. These investigations may result in enforcement activity by the Ministry of Labor.
For those who want to invest in cryptocurrency, what options would there be if it wasn’t available in a 401(k) retirement plan?
There is no shortage of cryptocurrency options for those looking to invest. Like any other investment, the suggestion is always to do enough research before pulling the trigger.
Do you think this might be a short-term warning from the Department of Labor, and that over time they might be more willing to allow 401(k) plans to explore cryptocurrency as an investment?
It all depends on market volatility. This warning from the Department of Labor makes perfect sense now, reminding trustees of the obligations that come with the job. But cryptocurrency has evolved and will continue to evolve. It is impossible to predict what the future holds. It is important for trustees and plan advisors to know the applicable rules and regulations when making investment decisions for 401(k) and other retirement plans.