Cryptocurrencies as Investment Options in 401(k) Plans | Goodwin

On March 10, 2022, the U.S. Department of Labor (“DOL”) issued a Compliance Assistance Release[1] (the “Communiqué”) expressing its views on the availability of cryptocurrencies on 401(k) investment platforms. This guidance comes as more and more 401(k) plan service providers have announced plans to make digital currencies available on their platforms. While the DOL has not taken a definitive position, it has expressed concern about the availability of cryptocurrencies for 401(k) plan participants. The DOL urges plan trustees to proceed with “extreme caution before considering adding a cryptocurrency option to a 401(k) plan’s investment menu…”[2]

In the statement, the DOL warns that a plan trustee’s decision to make cryptocurrencies available to its participants will be subject to ERISA’s duties of care and loyalty. These obligations include ensuring that the investment options made available to participants are prudent. Citing the Supreme Court’s decision in Hughes v. Northwestern, the DOL states that the requirement of prudence also extends to a fiduciary’s failure to remove imprudent investment options. In other words, a fiduciary can be held liable for breaching her fiduciary duties by choosing imprudent investment options or by allowing an investment option that has become imprudent to remain within the range of a plan. The DOL has identified its main areas of concern with 401(k) participants investing in cryptocurrencies as: (1) price volatility; (2) the challenge for plan members to make informed investment decisions; (3) custodial and record-keeping issues related to holding digital currencies, including digital theft; (4) the reliability and accuracy of cryptocurrency valuations; and (5) the changing regulatory environment surrounding cryptocurrencies.

DOL’s concern about cryptocurrency volatility stems from the price fluctuation that some cryptocurrencies have experienced. For example, in 2021, bitcoin traded near its low for the year just five months before subsequently hitting an all-time high. In June 2021, bitcoin was trading around $28,800[3] – a few hundred dollars above its low for the year of $28,610.[4] Five months later, in November, bitcoin soared to an all-time high of nearly $69,000.[5] During this five-month period, the price of bitcoin fluctuated around $40,000. This fluctuation is not idiosyncratic for bitcoin. Dogecoin, the cryptocurrency powered by billionaire Elon Musk, peaked at 75 cents in May 2021 and was among the top ten cryptocurrencies by value, but has since fallen 80% from its peak.[6]

Similarly, the DOL expressed concern about the evolving regulatory environment, which stems, among other things, from comments by the Chairman of the United States Securities and Exchange Commission (“SEC”), Gary Gensler, indicating that in his opinion most cryptocurrencies, other than bitcoin, are probably securities. In remarks delivered in August 2021, Gensler said he agreed with former SEC Chairman Jay Clayton that “every [Initial Coin Offering] [we have] vu is a security” to which the “federal securities laws apply”.[7] In remarks delivered in September 2021, President Gensler reiterated that in his view, “many [digital assets] are securities” and in our current crypto market “many tokens can be unregistered securities”.[8] Although the SEC has not yet offered definitive guidance on this matter, if the SEC were to declare that a particular cryptocurrency was a security issued in violation of securities laws, that finding could also have a significant impact. on the value of assets in a 401(k) portfolio.[9] Trustees should work closely with regulatory advisors to help them assess the risks of holding cryptocurrencies to include in the investment range.

Traditionally, cryptocurrencies were not commonly available as investment options for 401(k) plans.[10] However, in this evolving space, there are at least two 401(k) service providers that have announced plans to start making cryptocurrencies available on their investment platforms. For example, Fidelity, the nation’s largest retirement plan provider, serving more than 25,000 companies with $11.8 trillion in assets under management,[11] announced that later this year it will make available a Digital Asset Account, a custom plan account that will allow 401(k) plan sponsors to offer their participants exposure to bitcoin, not to exceed 20% of contributions or exchanges.[12] Also, ForUsAll, a provider that primarily serves small and medium-sized businesses[13] and manages over $1.7 billion in assets,[14] plans to make available to plan sponsors in the second quarter of 2022, a self-managed cryptocurrency window where participants can choose from a specified list of approved cryptocurrencies.[15] The ForUsAll platform will set a limit of 5% of the amount of their portfolio that a participant can allocate to cryptocurrencies.[16] Plan sponsors who choose to offer the cryptocurrency options can also set their own limits for participant contributions and redemptions. These options will allow businesses of all sizes to incorporate cryptocurrencies into their 401(k) plan’s investment menu and could also signal an emerging industry trend.

Cryptocurrencies provide fiduciaries with an attractive opportunity to offer a diverse range of investments and cater to participants’ interest in these assets. However, when considering cryptocurrencies, trustees will want to assess the risks accompanying such investments, including those identified by the DOL in its statement, and document their process.

While not included in the DOL Benefits Security Administration’s enforcement priorities for 2022, the DOL said it “plans to conduct a program of investigation aimed at plans that offer participants of investments in cryptocurrencies”.[17] In response, on April 12, 2022, a group of industry trade groups wrote to the Acting Deputy Secretary of the DOL requesting that the release be withdrawn and that the DOL conduct an appropriate rulemaking process.[18] The letter expressed concern about the DOL’s attempts to regulate through enforcement, rather than the notice-and-comment process that allows input from industry participants. Similarly, on May 5, 2022, in response to the DOL’s position, U.S. Senator Tommy Tuberville (R-AL) introduced legislation that would prohibit the DOL from issuing regulations or guidelines that would limit the type of investments that may be selected through a brokerage. window – including cryptocurrency.[19] Nonetheless, we anticipate that the DOL will be increasingly active in this space as more service providers and plan sponsors decide to pursue cryptocurrencies as investment options.

[1]Department of Labor Compliance Assistance Bulletin No. 2022-01. https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/compliance-assistance-releases/2022-01#footnotes.
[2]ID.
[3]See price tableCOINBASE, https://www.coinbase.com/price/bitcoin (last visited April 28, 2022)
[4]Richard Henry Suttmeier, How low can Bitcoin go?FORBES (June 9, 2021 12:21 p.m. EDT), https://www.forbes.com/sites/investor/2021/06/09/how-low-can-bitcoin-go/?sh=3f116eb3539a (last visit May 2, 2021); see also Price table, supra note 3.
[5]Vildana Hajric, Bitcoin Ends Its 2021 Hit With A December WhineBLOOMBERG (December 31, 2021 12:01 a.m. EST, updated December 31, 2021, 5:27 p.m. EST), https://www.bloomberg.com/news/articles/2021-12-31/bitcoin-is-ending-its-bang-of-a-2021-with-a-winter-whimper
[6]Billy Bambrough, Tesla Billionaire Elon Musk Suddenly Sent Bitcoin Rival Dogecoin “Joke” Price Significantly HigherFORBES (April 25, 2022, 9:51 a.m. EDT), https://www.forbes.com/sites/billybambrough/2022/04/25/tesla-billionaire-elon-musk-has-suddenly-sent-the-price-of-joke-bitcoin-rival-dogecoin-sharply- upper/?sh=1efa5e9477d1
[7]See remarks before the Aspen Security ForumSEC (August 3, 2021), https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03.
[8]View Transcript: The Way Forward: Cryptocurrency with Gary GenslerWASHINGTON POST (September 21, 2021, 2:21 p.m. EDT), https://www.washingtonpost.com/washington-post-live/2021/09/21/transcript-path-forward-cryptocurrency-with-gary-gensler
[9]See, for example, cryptocurrency XRP drops 24% after US SEC charges rippleREUTERS, https://www.Reuters.com/article/us-crypto-currency-ripple-idUSKBN28X116 (last visited April 29, 2022)
[10]Anne Tergensen, Fidelity will allow retirement savings to put Bitcoin in 401(k) accountsWSJ (April 26, 2022, 10:43 a.m. ET), https://www.wsj.com/articles/fidelity-to-allow-retirement-savers-to-put-bitcoin-in-401-k-accounts-11650945661.
[11]WorkplaceLOYALTY, https://www.fidelityworkplace.com/s/ (last visit May 1, 2022).
[12]Digital Asset Account, https://www.fidelityworkplace.com/s/digitalassets (last visit May 2, 2022); Tara Siegel Bernard, Fidelity’s new 401(k) offering will invest in BitcoinTHE NEW YORK TIMES (April 26, 2022), https://www.nytimes.com/2022/04/26/business/crypto-401k-fidelity.html.
[13]Jeanne Sahadi, Some 401(k)s will soon let you invest in cryptoCNN (April 1, 2022, 9:42 a.m. EDT), https://www.cnn.com/2022/04/01/success/cryptocurrencies-401ks/index.html.
[14]401(k) For Startups and Enterprises, https://www.forusall.com/for-employers (last visited April 28, 2022).
[15]Sahadi, supra note 13.
[16]Tanaya Macheel, This small 401(k) provider wants to bring cryptocurrency to Americans’ retirement fundsCNBC (June 10, 2021, 5:16 p.m. EDT), https://www.cnbc.com/2021/06/10/this-small-401k-provider-wants-to-bring-cryptocurrency-to-americans-retirement-funds.html.
[17]Release, above footnote 1.
[18]Austin Ramsey, Fidelity’s 401(k) encryption plan sets up a regulatory guessing gameBLOOMBERG LAW (April 28, 2022, 5:30 a.m.), https://news.bloomberglaw.com/employee-benefits/fidelitys-new-401k-crypto-product-outside-federal-oversight.
[19]https://www.tuberville.senate.gov/newsroom/press-releases/new-tuberville-legislation-promotes-financial-freedom-for-401k-investors/.

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