DOL 401(k) plan advice: Don’t add cryptocurrency

It has come to the Department of Labor’s (DOL) attention that some firms are offering cryptocurrency investments as an option in their 401(k) plans. This is not something that the DOL endorses.

In fact, the DOL warns plan fiduciaries to use extreme caution before adding this option to your 401(k) plan investments.

Here’s why: The Employee Retirement Income Security Act of 1974 (ERISA) requires fiduciaries to act solely in the financial interest of plan participants and adhere to an exacting standard of professional care. It they breach these duties, they’re liable for any losses to the plan that happen due to the breach.

Plus, when you offer several investment options to your plan’s participants, it’s the fiduciary’s obligation to ensure on a regular basis those options are sound ones. The burden of responsibility can’t be shifted to participants.

The Supreme Court also chimed in saying, “even in a defined-contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.”  

And any failure to remove these “imprudent investment options” is considered a breach of duty.

The DOL believe it’s way too early in cryptocurrencies’ history to place any kind of investment trust in it for 401(k) plans. Doing so places plan participants and fiduciaries at considerable risk.

Significant risk

In addition, cryptocurrency investments come with significant risk of fraud, theft and loss due to:

• Speculative and volatile investments: Even the Securities and Exchange Commission (SEC) has added its two cents, cautioning any type of investment as “highly speculative” at this stage of its development. There have been widely published incidents of theft and fraud, which contribute to its extreme price volatility. And this extreme volatility doesn’t bode well at all for plan participants, especially those on the verge of retirement.
• Informed investment difficulty: Cryptocurrencies are unlike any other type of retirement plan investments. Even experts have a hard time separating fact from fiction. Putting cryptocurrencies on a plan’s menu basically is saying experts endorse and approve this as a prudent plan option, which isn’t true.
• Issues with accountability: For the most part, cryptocurrencies exist as lines of computer code which can be easily hacked, or its password forgotten. And that means bye bye investment. It’s nothing like traditional plan assets in the sense of custodial and recordkeeping issues.
• Valuation questions: The DOL has pointed to the fact that even experts find assigning value to cryptocurrency “complex and challenging.” In addition, the proposed models for valuing cryptocurrencies aren’t nearly as “sound or academically defensible” as traditional investment models. And they aren’t held to the same standards when it comes to reporting and data integrity as traditional investments products.
• Evolving market: Cryptocurrency markets are still evolving and, as far as the rules and regs governing them go, not everyone is operating inside the lines. The DOL cautions fiduciaries who are considering including a cryptocurrency investment option because they’ll have to include “an analysis how regulatory requirements may apply to issuance, investments, trading, or other activities and how those regulatory requirements might affect investments by participants in 401(k) plans.” How do you do this in an ever-evolving, somewhat unstable market? In some cases, it could be seen as unlawful sale of securities in unregistered transaction.

Considering all of this, your best bet is not to offer cryptocurrencies as a 401(k)-investment plan option. It’s just much to unstable to jeopardize your plan participants’ investments, and your 401(k) plan.