Department of Labor Cautions ERISA Fiduciaries on Offering Cryptocurrency Investments

The U.S. Department of Labor has issued a stark warning to ERISA fiduciaries about offering cryptocurrencies and related products as potential investment options for plan participants. In Compliance Assistance Release No. 2022-01, issued on March 10, 2022, the Department took the position that sponsors and service providers should exercise "extreme care" before offering cryptocurrency as a plan investment option. The Department also warned that fiduciaries that choose to make cryptocurrencies available as 401(k) investment options should expect to face questioning from the Department's enforcement arm on how doing so squares with their fiduciary duties.

The Department's Concerns

After pointedly reminding fiduciaries of their obligations of prudence and loyalty and their ongoing duty to monitor investment options, the Department voiced skepticism about whether cryptocurrencies are appropriate investment vehicles for plan participants. It outlined five "serious concerns":

• Because cryptocurrencies have been subject to significant volatility and are recognized by the U.S. Securities and Exchange Commission (SEC) as "highly speculative," they may be ill-suited for significant retirement investment.
• It is particularly difficult for plan participants to make informed investment decisions about cryptocurrencies because they are novel, notoriously difficult to value and may be surrounded by "hype."
• Cryptocurrencies may be held in digital wallets or by other methods that make them vulnerable to hacking, theft or accidental loss.
• It is difficult to reliably and accurately value cryptocurrencies at this time.
• Cryptocurrencies may be subject to increased regulation from other agencies, as well as the risk that some market participants may not be in compliance with existing regulatory frameworks.

The Department noted that, by including cryptocurrencies in their 401(k) offerings, fiduciaries might lead plan participants to conclude that cryptocurrencies are approved as prudent investment options.

The Department's concerns were not limited to cryptocurrencies offered as direct investment options but extended to "other products whose value is tied to cryptocurrencies." The Department also raised concerns with cryptocurrencies offered through brokerage windows, self-directed accounts that allow plan participants to access investment options beyond the plan's designated investment alternatives.

Key Considerations

Although the Department's Compliance Assistance Release does not have the force of law, it represents a serious shot across the bow for fiduciaries considering offering cryptocurrency investment options to plan participants. Even where a fiduciary is confident that a cryptocurrency offering accords with its duties under ERISA, responding to an investigation can be an expensive and burdensome process.

The Release also raises questions as to what degree (if any) of indirect exposure of plan participants to cryptocurrency investments through "other products whose value is tied to cryptocurrencies" the Department will tolerate: i.e., whether indirect investment in a fund with a small percentage of its assets in cryptocurrency will be deemed to be unacceptably risky.

The Department's statement that fiduciaries that allow cryptocurrency investments through brokerage windows should expect questioning is concerning for another reason. It suggests that the Department may adopt the position that plan fiduciaries have a duty to monitor cryptocurrency investments offered through brokerage windows, and could signal that the Department is taking a more expansive view of the scope of fiduciary duties related to brokerage windows in general.

For more information or questions regarding the Department of Labor's Compliance Assistance Release or ERISA, contact the authors or another member of Holland & Knight's ERISA Litigation Team or Executive Compensation and Benefits Team.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.