The Employee Benefits Security Administration (EBSA) of the US Department of Labor issued Compliance Assistance Release No. 2022-01 cautioning plan fiduciaries to “exercise extreme care” before adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.
The compliance assistance’s purpose is to shield U.S. workers retirement savings from severe volatility and legal hazards.
According to the report, The Employee Retirement Income Security Act requires “plan fiduciaries to act solely in the financial interests of plan participants and adhere to the standards of professional care in considering investment options for participants in 401(k) plans.”
The DOL has severe concerns regarding the rationality of the fiduciary’s decision to expose a 401(k) plan’s members to direct investments in cryptocurrencies or other items whose value is connected to cryptocurrencies at this early stage in their existence.
These investments pose huge risks and obstacles to participants’ retirement accounts, including severe fraud, theft, and loss concerns, as stated by DOL.
The report cites several specific reasons, including:
- Cryptocurrencies are different from typical retirement plan investments, and “it can be extraordinarily difficult, even for expert investors, to evaluate these assets and separate the facts from the hype.”
- Cautions from the SEC that investment in a cryptocurrency is “highly speculative.”
- Cryptocurrencies are not held like traditional plan assets in trust or custodial accounts, meaning they might not be readily valued and available to pay benefits and plan expenses.
- Rules and regulations governing the cryptocurrency markets are evolving, and some market participants may be operating outside of existing regulatory frameworks or not complying with them.
- Concerns about the reliability and accuracy of cryptocurrency valuations.
Based on these and other concerns, EBSA says it expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products.
It will also be taking appropriate actions to protect the interests of plan participants and beneficiaries with respect to these investments.
The guidance concludes by saying, “The plan fiduciaries responsible for overseeing such investment options or allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks described above.”
This move from DOL comes at a time when recently the U.S. President Joe Biden signed an Executive Order to watch over cryptocurrency. The Whitehouse has observed the growth of crypto, hence the government wants to understand the risks and benefits associated with digital assets.
