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DOL Expresses Extreme Concern About Cautiousness of Cryptocurrency Investments in 401(k) Plans | JD Supra

On March 10, 2022, the United States Department of Labor (DOL) released Compliance Assistance Release No. 2022-01 (Release) regarding “Cryptocurrency” Investment in 401 Retirement Plans (k). In its statement, the DOL expressed strong caution towards plan trustees considering offering cryptocurrency investment options in their pension plans, noting major concerns about whether the offer such investments are prudent and within their fiduciary duties under the Employees Retirement Income Security Act 1974. , as amended (ERISA). The DOL further cautions against future investigation into pension plans that offer participants investments in cryptocurrencies, including allowing such investments through brokerage windows.

Under ERISA, pension plan trustees are required to act only in the best interests of plan participants and beneficiaries. With respect to defined contribution pension plans, such as a 401(k) plan, account value is largely dictated by employee contributions and the return on investment of those contributions. To this end, the trustees have an ongoing duty to ensure that only prudent investment options are offered under the plan – requiring initial and recurring independent assessments of all plan investment options to determine whether they are and remain prudent options. In the event of a breach of fiduciary duty, plan trustees may be personally liable for losses resulting from their reckless conduct.

The DOL listed a number of concerns about the prudence of cryptocurrency investments in pension plans, including their speculative and volatile nature, valuation difficulties (even for expert investors), custody issues, and record keeping (noting that cryptocurrency is not held in fiduciary/custodial accounts, but is encoded in a digital wallet and as such accounts may disappear completely if passwords are lost or cyberattacks), and the lack of a regulatory framework, which can lead to illegal sales through unrecorded transactions.

Although the release focuses on cryptocurrencies (or any other cryptocurrency-related investment products), the DOL noted that the same reasoning and principles would be applicable to a wide range of digital assets, including including but not limited to Tokens, Coins, Crypto Assets and all its derivatives.

The release provided a number of important takeaways for plan trustees.

First, the DOL has hinted that cryptocurrency will automatically be considered an imprudent plan investment, possibly representing the first time the DOL has drawn such a broad conclusion on a specific form of plan investment. The DOL is not authorized by law to draw this conclusion, because ERISA does not specifically allow an asset class to be de facto imprudent.

Second, and perhaps most notably, the DOL further warns that it will question the scheme trustees on the caution of allowing access to cryptocurrencies through brokerage windows. Traditionally, brokerage windows provide participants with access to buy and sell securities through their 401(k) plan account through a brokerage platform – availing of a much wider range of investments than that offered by the range. base investment funds of the plan. Historically, the DOL has not investigated brokerage windows, apparently allowing trustees to avoid liability for poor investment decisions made by participants. However, the decision to offer a brokerage window is considered a fiduciary decision, and by requiring fiduciaries to consider cryptocurrency transactions executed through brokerage windows, the DOL has significantly expanded the scope of the obligation to surveillance.

Although presented as a guide to cryptocurrency, the DOL’s position on this may have much wider application – opening the door to reviewing all plan investments made through brokerage windows. Therefore, plan fiduciaries should consider whether they are fiduciary responsible for any transactions made through a brokerage window, and not just cryptocurrency transactions. Given the potentially large number of investment transactions made through a brokerage desk, it would be unreasonable to expect trustees to monitor them all. While it is not yet clear how this issue will play out in the future, plans currently offering brokerage windows, or those considering adding them to their accounts, should carefully evaluate the potential fiduciary implications associated with such arrangements.

The DOL said it plans to investigate plans offering cryptocurrency as an investment option in their range of retirement plans, researching the basis on which the plan’s trustees have determined these investments to be prudent. Given the DOL’s strong stance against cryptocurrency investments, as well as this increased level of scrutiny, plan trustees should be careful when deciding whether or not to offer cryptocurrencies as an investment option. of plan. If cryptocurrency is offered as an investment option, plan trustees should document why the investment was considered an appropriate plan investment and be prepared to answer questions from the DOL regarding its prudence.

In addition, plan trustees that offer access to a brokerage window (or are considering adding one) should monitor future updates to the DOL and reconsider whether the brokerage window remains a prudent decision and whether they need to rethink how they monitor transactions made through them.

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