Hinting that the US Department of Labor (DOL) is currently working on guidance related to cryptocurrency, the Acting Assistant Secretary for the DOL’s Employee Benefits Security Administration recently commented that the DOL finds the prospect of cryptocurrency investments in 401(k) plan lineups “troubling.” This may be a sign of DOL focus on the increasing frequency of ERISA plan investments in cryptocurrency vehicles, including funds with cryptocurrency exposures.
Cryptocurrency Options in Investment Lineups?
There have been recent reports of interest in cryptocurrency investing by at least some ERISA plans, including interest in investing in funds that incorporate cryptocurrencies. This fits within a broader trend of the expanding popularity of cryptocurrencies over the past several years. The US Securities and Exchange Commission (SEC) recently highlighted that the cryptocurrency “asset class” is worth roughly $1.6 trillion, including 77 tokens worth at least $1 billion each, and 1,600 tokens worth at least $1 million. Perhaps unsurprisingly, federal regulators are taking an interest in cryptocurrencies and the risks they can present for investors. For example, as recently highlighted in a prior blog post, the SEC has identified that it has a regulatory focus on investor risks related to cryptocurrencies.
The DOL has now followed those regulators. A DOL representative recently confirmed that the DOL is examining risks related to ERISA-regulated retirement assets investing in cryptocurrency vehicles. Though current law does not prohibit holding cryptocurrencies in Code Section 401(k) plans, the numerous ERISA lawsuits (including a recent wave) challenging the structure of plan investment lineups has resulted in many plan sponsors favoring safer and less exotic and/or volatile investments. In this litigious climate, there can be pressure on plan fiduciaries to favor stable, transparent, and low-cost investments like index funds to avoid potential litigation. Though recent lawsuits have examined how ERISA regulates alternative investments like private equity or hedge funds, the DOL has not yet released guidance directly related to cryptocurrency investments.
Investing in cryptocurrency and cryptocurrency funds—which are much less stable or transparent than mutual funds—may still be far away from the investment universe of a typical ERISA plan. However, as noted above, there are reports that at least some ERISA plan sponsors are exploring cryptocurrency investments or investments with varying degrees of cryptocurrency exposures. In addition, in response to growing participant demand, there are also reports of some plan sponsors permitting 401(k) participants to make small cryptocurrency investments through self-directed brokerage windows. Most federal courts that have considered the issue have agreed that investments selected through individual brokerage windows are not investment options subject to ERISA’s fiduciary duties—outside of actions related to the selection and monitoring of the brokerage provider.
A Lot of Noise and Very Little Transparency
As cryptocurrency makes possible inroads into ERISA plans, the DOL is taking notice and expressing concern. Speaking at a conference in late July, Acting Assistant Secretary Ali Khawar noted that the DOL is concerned about the fiduciary implications of investments with cryptocurrency exposure. He explained that this concern comes from the “noise,” “volatility,” and “very little transparency” associated with cryptocurrencies.
We will be watching DOL activity on this closely, as Khawar stated that he anticipates the DOL will issue cryptocurrency guidance in the “near future” but gave scant details on the content of the upcoming guidance.
Given the DOL’s interest in this topic, if you are seeking to add cryptocurrency exposure to an ERISA plan’s designated investment options, or through a brokerage window, please reach out to the authors or your primary contact on benefits matters at Morgan Lewis.