Last week, we shared five reasons why cryptocurrencies can present serious risks to 401(k) fiduciaries and participants. Since then, there has been some confusion about fiduciary duties when it comes to a cryptocurrency option that is fully integrated into a plan’s core investment line up or offered via a brokerage window, which allows participants to invest outside the core investments.
According to an April 11, 2022 statement provided to Bloomberg Law, brokerage windows alone have never absolved fiduciaries of their duties of prudence and loyalty to plan participants. The Department of Labor (DOL) expects plan fiduciaries to be able to respond to questions about their decisions to make cryptocurrency investments available to 401(k) plan participants, whether as designated investment alternatives or through a self-directed brokerage account.
According to an April 11, 2022 statement provided to Bloomberg Law, brokerage windows alone have never absolved fiduciaries of their duties of prudence and loyalty to plan participants. The Department of Labor (DOL) expects plan fiduciaries to be able to respond to questions about their decisions to make cryptocurrency investments available to 401(k) plan participants, whether as designated investment alternatives or through a self-directed brokerage account.
Brokerage Window or In-Plan Offering?
On April 12, American Benefits Council along with other groups sent a letter to the Employee Benefits Security Administration (EBSA) acting assistant secretary Ali Khawar requesting that Compliance Assistance Release No. 2022-01 be withdrawn and that DOL instead develop guidance in this area through notice-and-comment rulemaking. The letter says that—in addition to concerns about its legality and enforceability—the guidance creates confusion for plan fiduciaries regarding whether only “direct” investment in cryptocurrencies (as opposed to indirect investment in cryptocurrencies through vehicles such as publicly traded mutual funds or exchange-traded funds) would be questioned.
No Ban on Cryptocurrency
Since then, news outlets have reported on written responses and interviews from EBSA staff.
On April 28, Bloomberg law reported quotes from Khawar that seem to be responses to the following concerns documented by the American Benefits Council letter.
- *Concerns about EBSA deciding which investments are appropriate:
“There are significant concerns that we have about cryptocurrency. That doesn’t mean that it’s banned—we were very clear that we are not banning cryptocurrency—but we were very clear that when you’re thinking about these things and you’re making them available and, importantly, when you’re actively promoting them, we will ensure they are in a participant’s best interests,” Khawar said.
- *Confusion over whether this was intended as a new fiduciary standard with respect to brokerage windows:
The guidance wasn’t written to find a “backdoor way to regulate brokerage windows in a whole new way,” Khawar said. “The guidance does not say and was not intended to say that what you now have to do is, if you have a thousand options available in a brokerage window, you need to go and review every one of them and make sure that you would personally invest in them as a fiduciary.”
More on Fiduciary Responsibilities and Brokerage Windows
Prior to the Bloomberg Law article, Khawar wrote an April 20 letter to Senator Tommy Tuberville that provided additional information on EBSA’s position on brokerage windows. “EBSA is not taking a novel position by asserting that ERISA imposes obligations on fiduciaries of plans with self-directed brokerage accounts or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan. The Department has long indicated that fiduciaries have responsibilities with respect to brokerage windows,” the letter stated. Khawar cited the 2012 Field Assistance Bulletin (FAB) that specifically noted that “fiduciaries of such plans with platforms or brokerage windows, self-directed brokerage accounts, or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan are still bound by ERISA section 404(a)’s statutory duties of prudence and loyalty to participants and beneficiaries who use the platform or the brokerage window…including taking into account the nature and quality of services provided in connection with the platform or the brokerage window . . . ” (FAB 2012-02R, Question 39).
Fiduciary Responsibilities and a Plan’s Core Investment Lineup
Last week, 401(k) plan provider Fidelity announced its plans to offer a crypto retirement product via an in-plan option. Fidelity says it will enable employees who are comfortable with the risks and volatility of cryptocurrency to invest in bitcoin. The bitcoin would be held at Fidelity through a digital assets account within the core lineup of their 401(k) plan so that it has institutional-grade security, the company said. Employers that decide to offer the option will choose what percentage of an employee’s contributions can be directed into crypto, up to a cap of 20%.
“We have grave concerns with what Fidelity has done,” Khawar said in an interview with The Wall Street Journal published on April 28. Khawar said he and his colleagues have scheduled a conversation with Fidelity to discuss some of their concerns, including the 20% cap on an employee’s contributions directed into bitcoin. Khawar said the Labor Department has similar concerns with an offering from ForUsAll Inc., a 401(k) plan provider that allows employees in plans it administers to invest up to 5% of their 401(k) contributions in bitcoin and other digital currencies via a self-directed digital-asset window.
Key Takeaways
DOL is standing firm that while cryptocurrency has intriguing use cases, it needs “maturing” before people can put their retirement savings into it, including the development of consumer protections. We will monitor formal rulemaking and further guidance or clarifications.
In the meantime, plan sponsors should keep the following in mind:
- Compliance Assistance Release 2022-01 is focused on the current development stage of cryptocurrencies. Rapid developments could continue. Plans should consult their legal counsel and other service providers for advice on offering a cryptocurrency option to plan participants.
- To learn more about cryptocurrencies in general, check out this Benefits Magazine article Cryptoassets: A Viable Asset for Pension Funds?
- Khawar said if plan sponsors think they can make a case for cryptocurrency in their 401(k) plans and have addressed EBSA’s concerns, they could make such investments available to participants.
- Decisions should be documented. Plan fiduciaries should be prepared to discuss their decision-making process and explain whether the investments are subject to any limitations or protections set forth in the plan. For example, in light of ERISA’s fiduciary duties of prudence and loyalty, EBSA says it is reasonable to expect plan fiduciaries to be able to respond to questions about their decisions to make cryptocurrency investments available to plan participants, whether as designated investment alternatives or through a self-directed brokerage account or similar arrangement.
- Plan sponsors likely already provide participant education on individual risk tolerance, diversification of assets and long-term retirement savings goals. We can draw parallels between DOL’s information letter on private equity investments from June 2020 and DOL’s follow-up supplemental statement from December 2021 because, like cryptocurrency, private equity investments are considered high-risk. Helpful tips about participant educational materials are found in the Benefits Magazine article Proceed With Caution: Private Equity for Participant-Directed DC Plans.
“Plan trustees should further work closely with the investment consultant to develop educational materials for plan participants. While they need not be designed to scare off plan participants, these materials should not hide the complexity, risk and cost associated with private equity investments. The educational materials should include a description of the various factors (e.g., risk, liquidity, cost), in the simplest terms possible, to allow plan participants to make an informed decision on whether private equity is an appropriate investment choice.”
Educational material guidelines would be similar for cryptocurrency plus the risks detailed in Compliance Assistance Release 2022-01.
Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.
Jenny Lucey, CEBS
Manager, Reference/Research Services at the International Foundation
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