The U.S. Labor Department’s recent cryptocurrency guidance has doused an alternative retirement investment class that was heating up among younger 401(k) savers eager to capitalize on what they saw as inflation-resistant gains.
The agency’s guidance (No. 2022-01) sends a clear message to plan sponsors interested in adding digital currencies to their lineups — that such a move risks triggering a full-scale federal investigation.
“It’s pretty clearly saying, ‘If you’ve done this, you’d better watch out, because we’re coming,’” said Paul Hamburger, a partner at Proskauer Rose LLP in Washington, D.C. “I’ve never seen that, going back decades. I’m hard-pressed to think of another scenario where it’s been this strongly stated.”
Retirement plan advisers say the department’s position comes as close to an all-out ban on crypto-funded 401(k)s as is possible with such guidance. The department abandoned more targeted, moderate warnings it sounded against private equity 401(k) investments earlier this year, in a move that may sweep so-called brokerage window plan designs, where investors can buy and sell securities through a brokerage platform, under the department’s regulatory umbrella.
“It’s not going to be workable if this guidance means that plan sponsors have to monitor all of the investments within a brokerage window,” Hamburger said.
More than half of the respondents to a Capitalize Money Inc. survey this month said they view digital assets as a strong retirement planning option, yet fewer than 5% actually use their retirement accounts to invest in cryptocurrency, non-fungible tokens or meme-coins.
Employees are intrigued by the cryptocurrency craze, and plan sponsors are paying attention, according to Sarah Keibler, a retirement plan adviser at Alliant Retirement Consulting.
“They’re curious and they’re worried,” Keibler said. “They’re hesitant to pull the trigger, because they ultimately don’t understand how it works.”
The Labor Department is signaling that regulators aren’t willing to wait, said Hamburger.
Digital currencies are speculative and volatile investments, the department’s Employee Benefits Security Administration said in its guidance. Decentralization makes it difficult for plan officials to properly track and evaluate their performance, while putting enormous pressure on service providers to store assets securely.
Crypto investments can attract interest from “inexperienced plan participants with expectations of high returns and little appreciation of the risks the investments pose,” Ali Khawar, the agency’s acting assistant secretary, said in a blog post accompanying the guidance. “It can be very hard for ordinary investors to separate fact from hype.”
Khawar told the American Academy of Actuaries earlier this month that the Labor Department has been concerned about money managers tailoring their crypto products for 401(k)s.
The clearest path for crypto-exposure in 401(k)s is through those brokerage windows—portals the investments plan sponsors offer their participants that give workers access to the broader market of investments, without strict oversight from employers or regulators.
Low-cost 401(k)-provider ForUsAll Inc. has partnered with Coinbase Global Inc., the largest U.S. digital currency exchange platform, to offer an in-plan brokerage window that allows employee investors to transfer up to 5% of their nest eggs directly into more than 50 different cryptocurrencies.
The company and its 400 employer clients are among the first to give workers direct access to crypto holdings through their qualified retirement accounts, leveling the playing field by offering working class-savers a chance to cash in on the same growth billionaires and major corporations have enjoyed for years.
ForUsAll CEO Jeff Schulte said his company spoke at length with the Labor Department as it designed the program to set guardrails that protect participants from market volatility, and plan sponsors from legal trouble.
Such language includes the 5% cap on investments, institutional-grade crypto-investments only, a quiz to ensure investors know enough about trading and proactive monitoring, and alerts for participants and sponsors.
“We know that employees and employers want access to digital assets in their 401(k)s, and there’s nothing in the DOL notice that says that you can’t offer access to digital assets as long as you do it prudently,” Schulte said. “We’re meeting the industry and providing these building blocks in a way that are designed to comply so that employees aren’t at a structural disadvantage.”
Peering Into Brokerage Windows
The department said it would launch an “investigative program” targeted at plan sponsors that ignore its advice and choose to offer crypto investments anyway. Regulators will “take appropriate action” to protect savers from undue harm the investments may cause.
“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,” the department said.
That’s a line in the sand regulators have never crossed before, said Alan Levine, partner and co-chair of the executive compensation and employee benefits department at Morrison Cohen LLP in New York.
“They could use this as a hook to regulating brokerage windows,” Levine said. “There’s no question.”
A 2012 field assistance bulletin from the department’s Employee Benefits Security Administration temporarily put that standard in place before the agency walked it back in revised guidance later that year.
If there were a requirement to monitor practically the entire stock market the same way plan sponsors do individual mutual funds, it would effectively eliminate brokerage windows as a viable investment option, said Kent Mason, a partner at Davis & Harman LLP in Washington D.C.