The U.S. Department of Labor (DOL) recently issued a compliance assistance bulletin, which does not carry the force of law, regarding offering cryptocurrency investments in a defined contribution (DC) plan, with a significant number of stern warnings about the potential fiduciary challenges.
Background on the DOL Cryptocurrency Bulletin
With the rapid rise in the total size of the digital assets investment market over the past few years, the DOL noted there is increasing interest in offering digital assets investments within retirement plans.
To provide greater clarity for plan sponsors, the DOL took two actions. First, it issued Compliance Assistance Bulletin 2022-01, which details many potential regulatory and fiduciary challenges associated with offering these assets in the context of a retirement plan. Second, the Employee Benefits Security Administration (EBSA) within the DOL announced its intent to investigate plans that offer digital assets, and to take appropriate actions to protect the interests of plan participants and beneficiaries with respect to these investments. Notably, the EBSA investigations will cover both the core investment options as well as cryptocurrency investments through brokerage windows.
The challenges cited by the DOL include:
- “Significant risks of fraud, theft, and loss…”
- The speculative nature and observed volatility of digital assets
- The difficulty for participants to make an informed investment decision
- The inability to custody digital assets, which generally exist as computer code within a digital wallet and cannot normally be deposited in a trust held at a custodial bank
- Uncertainty pertaining to fair market valuations and concerns that “none of the proposed models for valuing cryptocurrencies are as sound or academically defensible as traditional discounted cash flow analysis for equities or interest and credit models for debt”
- Evolving regulatory concerns, with two very stark warnings that:
- “…some market participants may be operating outside of existing regulatory frameworks, or not complying with them”
- “…the sale of some cryptocurrencies could constitute the unlawful sale of securities in unregistered transactions”
It is rare for the DOL to use such stark language in warning plan fiduciaries about future enforcement actions or the lack of clear regulations. Fiduciaries that wish to offer these investments will face a range of significant legal risks in order to do so, and caution is warranted in taking any significant steps in that direction.