The Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor (DOL) issued Compliance Assistance Release No. 2022-01 on March 10, 2022. This release warns plan fiduciaries to exercise extreme caution before adding a cryptocurrency investment option to their 401(k) plan’s investment menu for participants.
Fiduciary Duties Under ERISA
ERISA fiduciaries must exercise a professional standard of care, prudence, and loyalty, that is solely in the best interests of plan participants. Fiduciaries who breach this extraordinarily high standard of care are personally liable for any losses that their breach causes. This standard of care applies to selecting investment options for 401(k) plan participants, including a cryptocurrency option. In addition, fiduciaries have an ongoing duty to ensure the prudence of investment options in the plan, as those choices determine the value of the participants’ retirement plans.
Risks of Cryptocurrency Investments
EBSA states that direct cryptocurrency investments and other products whose value depends on cryptocurrency present substantial risks of fraud, theft, and loss, as follows:
- Speculative and Volatile – Cryptocurrencies have been subject to speculation and extreme price volatility due to the uncertainties associated with this form of investment. Reports of fictitious trading, theft, and fraud also have contributed to price volatility.
- Plan Participants Less Likely to Make Informed Decisions – Cryptocurrencies are widely marketed as innovative investments resulting in massive profits. Inexpert plan participants may engage in risky investments and be unable to get sufficient information about cryptocurrency to make informed decisions about these investments instead of traditional investments.
- Custodial Accounts and Recordkeeping – Cryptocurrencies exist as computer code in a digital wallet rather than readily available funds held in trust or custodial accounts. As a result, losing a password can lead to losing some cryptocurrencies forever, which presents a problem for investors. Cryptocurrencies also may be more vulnerable to hacking and other forms of theft to their nature, as opposed to traditional assets.
- Valuation Difficulties – Appropriate valuation of cryptocurrencies can be complex, unreliable, and inaccurate. Many experts disagree on appropriate valuation methods, leading to inconsistent accounting and valuation.
- Lack of Regulatory Environment – Due to the novelty of cryptocurrency, rules and regulations concerning the currency are still evolving. Some market participants in cryptocurrency may be operating outside current regulatory structures, resulting in unlawful transactions. Fiduciaries must avoid liability by refraining from participation in unlawful activity, including unregulated transactions and inadequate disclosures.
EBSA plans to investigate further plans that offer investment options in cryptocurrency and related options. The goal is to take any actions necessary concerning these options to protect the interests of plan participants and beneficiaries. EBSA also wishes to ensure that plans can meet their fiduciary duties when offering these investment options.
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