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Crypto Investing in 401(k)s Draws Political Lines in Congress

May 6, 2022, 5:02 PM

U.S. lawmakers are drawing battle lines in the fight over cryptocurrency assets in 401(k) retirement plans.

Sen. Tommy Tuberville (R-Ala.) has introduced a measure that would prohibit the U.S. Labor Department from limiting the kinds of products workplace retirement savers can invest in through self-directed brokerage accounts. Sen. Elizabeth Warren (D-Mass.), meanwhile, is admonishing Fidelity Investments Inc. for its decision last week to launch a new 401(k) cryptocurrency product.

The Labor Department lit a fuse under the crypto investing world in March when it issued guidance all but banning 401(k) plans from offering digital currency assets. The guidance implicated so-called brokerage windows for the first time, threatening options that give 401(k) investors access to the broader market through tax-advantaged plans.

The proposed Financial Freedom Act (S. 4147) Tuberville introduced Thursday would protect sponsors from regulatory pressure to monitor the investments participants choose on their own through a brokerage window.

The Labor Department’s guidance threatened an “investigative program” aimed at plan sponsors that offer crypto investments either on a 401(k) menu or through self-directed brokerage accounts. Employee benefits attorneys had long understood that brokerage accounts were outside the department’s enforcement purview, meaning the crypto guidance could be signaling a change in broader regulatory posture.

“The Biden administration has taken it upon itself to dictate what assets are viewed worthy of retirement investment, taking the decision away from individual investors by issuing regulatory guidance targeting cryptocurrency,” Tuberville said in a statement. “This is government overreach at its finest.”

‘Speculative Gamble’

Officials have been scrambling to set the record straight on brokerage windows since the guidance came out March 10. Employee Benefits Security Administration Acting Assistant Secretary Ali Khawar told Blooomberg Law last week that the guidance wasn’t intended as a “backdoor way to regulate brokerage windows in a whole new way.”

The agency’s crypto guidance warns sponsors that cryptocurrency investments are volatile and difficult to accurately value in the market. Even seasoned investors may have limited knowledge or experience trading digital coins, the agency said, making it difficult to “separate the facts from the hype.” Khawar said he had “significant concerns” about Fidelity’s decision to flout the guidance and launch a 401(k) crypto product in the days since the guidance was released.

Warren backed the agency up in a letter to Fidelity CEO Abigail Johnson May 4.

“Investing in cryptocurrencies is a risky and speculative gamble, and we are concerned that Fidelity would take these risks with millions of Americans’ retirement savings,” Warren wrote.

She asked that the financial services giant to respond to a series of questions about how it is protecting investors from crypto risks, fees those investors may have to pay, Fidelity’s own stake in cryptomining, and related conflicts of interests.

Fidelity won’t have to answer directly to the Labor Department for its decision to offer cryptocurrency investment products. The department’s regulatory controls only reach as far as Fidelity’s customers—plan sponsors choosing the investments to offer workplace investors. Still, the company said it believes the department should withdraw its guidance.

“The growing, mainstream interest in crypto investing, along with feedback from our plan sponsors compelled us to develop a product that would be available for plan sponsors if they decided they wanted to provide their employees with access to digital assets within their 401(k)s,” Dave Gray, head of Fidelity’s workplace retirement offerings and platforms, told Bloomberg Law.

To contact the reporter on this story: Austin R. Ramsey in Washington at aramsey@bloombergindustry.com

To contact the editor responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Laura D. Francis at lfrancis@bloomberglaw.com