Crypto Freefall Gives Retirement Plans New Reason to Avoid Risk

Upheaval in the cryptocurrency market puts teeth in a US Labor Department push to discourage retirement plans from adding digital assets to their 401(k) plan lineups.

Crypto markets lost more than $270 billion just weeks after the department’s Employee Benefits Security Administration issued strongly worded guidance (CAR No. 2022-01) all but banning retirement plans from offering crypto assets.

Even before the cryptocurrency price drops, plan sponsors who wanted to offer the assets were facing the threat of a Labor Department probe that would consume their attention and resources. The current market trend makes it tougher for plans to defy the agency, now that they can no longer point to strong performance as a defense.

“The recent drop in the cryptocurrency markets has provided the DOL with a bit of an ‘I told you so’ opportunity,” said Matthew Eikman, national retirement practice leader at Prime Capital Investment Advisors LLC in Omaha, Neb.

The agency’s warnings about “speculative and volatile” crypto investments are supposed to be grounded in technical employee benefits law that holds retirement plan decision-makers to a strict, fiduciary process standard. Market fluctuations shouldn’t influence those decisions, benefits attorneys said.

Still, a week that saw tech-aligned giants such as Bitcoin and Ether’s prices fall and a supposedly market-resistant stablecoin go belly-up is sure to make a difference.

“What’s interesting about fiduciary responsibilities related to retirement plans is that they’re not supposed to be about getting it right, but trying to get it right,” Eikman said.

‘Very Disruptive’

The Labor Department’s employee benefits agency bucked more than just tradition when it rolled out its guidance in March warning plan sponsors they could be investigated for exposing participants to cryptocurrency investments.

“EBSA expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments,” EBSA said in its guidance.

Plan officials may be more concerned about the outcome of cryptocurrency investments since the department appeared to come to its own conclusion about their prudence, said Allison Itami, a principal and co-chair of the plan sponsor practice at Groom Law Group Chtd. in Washington, D.C. Itami said the agency’s stance is “a departure” from its usual subregulatory guidance.

“I don’t think that the way that the department rolled this guidance out was about procedural prudence rather than a bar—a practical ban on cryptocurrency investments,” Itami said. “The department told fiduciaries that, by adding cryptocurrency to a 401(k) portfolio, they’re signing up for an audit or investigation, which is an expensive and very disruptive proposition.”

In its March guidance, the agency said cryptocurrencies have been subject to “extreme price volatility” due to market uncertainties, speculative conduct, fictitious trading, and even theft and fraud.

An agency official underscored its concern Monday.

“The past week we’ve seen this volatility in action, in some instances taking a devastating toll on people’s savings,” said Acting Assistant Secretary of Employee Benefits Ali Khawar in a statement. “We continue to be concerned about the potential for harm to retirement savers.”

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Process, Not Results

EBSA usually regulates voluntary, private-sector retirement plans by applying fiduciary standards to the people responsible for making investment decisions on behalf of plan participants.

The standards are about the process plan sponsors used to come to a decision, rather than results, said Eikman. Retirement plans considering what investments to include in a plan lineup apply a prudent procedural process that examines market trends in addition to factors such as asset liquidity and trading restrictions.

Dramatic fluctuations in crypto prices are a good example the department could point to in order to support its crypto-related concerns, Eikman added, but the guidance is supposed to be able to withstand the same legal test even if cryptocurrency values have increased.

“The department’s messaging should probably be a little bit less of an ‘I told you so,’ and instead be pointing to the crypto market as a convenient example of the sort of things that it brought up,” said Eikman. “If crypto markets had increased by 25%, the Labor Department’s message would still be the same.”