Not Very Cryptic - DOL Expresses Skepticism Regarding 401(k) Investment in Cryptocurrency

Yesterday, on March 10, 2022, the U.S. Department of Labor (the "Department") issued Compliance Assistance Release 2022-01 (the "Release"), in which the Department "caution[ed] plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan's investment menu for plan participants." The Release was motivated by the "marketing [of] investments in cryptocurrencies to 401(k) plans as potential investment options for plan participants."

While the Release does not establish any new legal principles, it would appear to set a skeptical tone regarding the appropriateness of cryptocurrency investment options under 401(k) (and similar participant-directed) plans ("Plans"). Thus, for example, the DOL stated:

At this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary's decision to expose a 401(k) plan's participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies. These investments present significant risks and challenges to participants' retirement accounts, including significant risks of fraud, theft, and loss . . . 

Extreme volatility can have a devastating impact on participants, especially those approaching retirement and those with substantial allocations to cryptocurrency.

Cryptocurrencies are often promoted as innovative investments that offer investors unique potential for outsized profits. These investments can all too easily attract investments from inexpert plan participants with great expectations of high returns and little appreciation of the risks the investments pose to their retirement investments.

. . . When plan fiduciaries, charged with the duties of prudence and loyalty, choose to include a cryptocurrency option on a 401(k) plan's menu, they effectively tell the plan's participants that knowledgeable investment experts have approved the cryptocurrency option as a prudent option for plan participants.

Cryptocurrencies are not held like traditional plan assets in trust or custodial accounts, readily valued and available to pay benefits and plan expenses. . . .

. . . The Department is concerned about the reliability and accuracy of cryptocurrency valuations. . . .

. . . Rules and regulations governing the cryptocurrency markets may be evolving, and some market participants may be operating outside of existing regulatory frameworks or not complying with them. Fiduciaries who are considering whether to include a cryptocurrency investment option will have to include in their analysis how regulatory requirements may apply to issuance, investments, trading, or other activities and how those regulatory requirements might affect investments by participants in 401(k) plans. [An agency within the Department] expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments. The plan fiduciaries responsible for overseeing such investment options or allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty . . . .

While, as indicated above, the Release does not break any new legal ground, the Department seems clearly to be discouraging the inclusion of cryptocurrencies as investment options under Plans, at least at this juncture. It appears that, where the Department sees investment trends that are for whatever reason of concern to it, it issues authority with a denigrating tone regarding such trends - a recent example being the December 21, 2021 supplement to a prior information letter regarding investment in private equity under Plans, discussed by us here.

Plan fiduciaries and providers alike will need to decide for themselves whether and how to proceed with cryptocurrency investments under Plans in light of the Release. If you would like to discuss the Release, or any other aspect of possible investment by Plans in cryptocurrency, please contact any of the Dechert lawyers listed below or any Dechert lawyer with whom you regularly work.