On March 10, 2022, the U.S. Department of Labor (DOL) published Compliance Assistance Release No. 2022-01 (CAR 2022-01). CAR 2022-01 was prepared to give guidance to plan fiduciaries as to the standard of care required when considering or offering cryptocurrencies as a plan investment. ERISA provides that fiduciaries must act within the best financial interests of the plan participants which courts have held to be duties of prudence and loyalty. The DOL expressed its “serious concerns about the prudence of a fiduciary’s decision to expose 401(k) plan participants to direct investments in cryptocurrencies.”
The DOL’s concerns stem from “significant risks and challenges” to retirement accounts involving fraud, theft, and loss for the following reasons:
• Highly speculative and extremely volatile nature – The market has shown extreme price volatility and numerous uncertainties involving the valuation of these assets, speculative conduct, and the amount of fictitious trading reported.
• Difficulty for participants to make well-informed investment choices – Since cryptocurrencies are new to the investment market, it can be extraordinarily difficult for participants and even for expert investors to have sufficient knowledge and information to understand these assets.
• Custodial and recordkeeping challenges – The custodial and recordkeeping vendors normally deal with plan assets that can be valued with little or no problem. This is not the case with cryptocurrencies. There also are many unanswered questions regarding how to satisfy ownership, trust requirements under current regulations, and cybersecurity vulnerability.
• Valuation of plan assets concerns – There is not a consistent accounting treatment of these assets. At this time, cryptocurrency market intermediaries are not required to apply consistent accounting, reporting, and data integrity requirements with respect to pricing as is used with more traditional investment products.
• Evolving regulatory landscape – The regulatory landscape governing the cryptocurrency markets is still evolving, and some participants may be operating outside of existing regulatory frameworks or not complying with them.
Although the DOL has outlined its concerns, it has not enforced an absolute restriction on plan sponsors to offer plan participants exposure to cryptocurrencies. However, in this release, the DOL has notified plan fiduciaries that it plans to initiate a program targeted at plans that offer cryptocurrencies as an investment option. This includes plans that offer these investments through brokerage accounts. And plan sponsors should expect to be able to answer questions with documentation, to show how they determined that their actions were prudent when weighing all the risks described above. So, plan sponsors with cryptocurrencies in your plan? Be ready, because the DOL may be knocking on your door soon.