In just lately issued Compliance Help Release No. 2022-01 (the “Release”), the Department of Labor (the “Department”) addressed cryptocurrencies as 401(okay) plan investments. To the shock of some and the delight of others, the Department didn’t shut the door on these investments. It did, nevertheless, counsel excessive warning.
The Launch opens with the acquainted admonition that fiduciaries should act solely in the monetary pursuits of plan contributors and cling to an exacting normal of skilled care. Trying to Supreme Courtroom precedent for additional clarification, the Department says that:
“[E]ven 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.” [Hughes v. Northwestern University, 142 S.Ct. 737, 742 (2022)]
Based on the Department, “cryptocurrency investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss.” Consequently, the Department expressed its severe considerations in regards to the prudence of a fiduciary’s choice to show a 401(okay) plan’s contributors to direct investments in cryptocurrencies.
The Launch outlines a collection of points, together with that cryptocurrency investments are speculative and risky and that the guarantees made by cryptocurrency promoters are troublesome to guage. As well as, as a result of these investments typically exist as traces of pc code in a digital pockets, they current novel custodial, recordkeeping and valuation challenges. The Department additionally cited the evolving regulatory setting in which the cryptocurrency markets function as one thing that fiduciaries should navigate.
Claiming, “the sale of some cryptocurrencies could constitute the unlawful sale of securities in unregistered transactions,” the Department admonished fiduciaries to take care to keep away from collaborating in illegal transactions. These transactions would expose fiduciaries to legal responsibility, and plan contributors to the dangers of insufficient disclosures and the loss of investor protections which might be assured beneath the securities legal guidelines. The Department additionally cited to warnings from the Monetary Business Regulatory Authority (FINRA) to the impact that cryptocurrencies have “been used in illegal activity, including drug dealing, money laundering, and other forms of illegal commerce.”
Primarily based on these and different considerations, the Department introduced that it expects to conduct an investigative program aimed toward plans that supply participant investments in cryptocurrencies, and to take applicable motion to guard the pursuits of plan contributors and beneficiaries with respect to those investments.
We suppose that plan sponsors and plan fiduciary committees might use the Launch as a foundation for continuing with cryptocurrency investments, however we expect that will be a mistake. The Department’s description of its considerations and points is compelling. It ought to give any considerate fiduciary pause. The higher method is likely to be to make use of the Launch as a motive to attend till the Department has the chance to check the matter and difficulty additional steerage that will serve to justify cryptocurrency as a prudent retirement plan funding choice.