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Crypto-Funded 401(k)s Merit Caution, Labor Department Warns (1)

March 10, 2022, 6:44 PMUpdated: March 10, 2022, 9:10 PM

The U.S. Labor Department is urging workplace retirement plan officials to exercise “extreme care” as they consider cryptocurrency investments.

DOL’s Employee Benefits Security Administration issued a compliance assistance notice Thursday cautioning against cryptocurrency assets in 401(k) plans. The agency said it will launch an investigative program to ensure that plans offering them are adequately protecting the interests of plan participants and beneficiaries.

Digital currencies are speculative and volatile investments, the benefits agency said. Decentralization makes it difficult for plan officials to properly track and evaluate their performance while putting enormous pressure on record-keeping and custodial firms to ensure the non-fiat assets are properly stored.

“What we’re saying is that 401(k) fiduciaries really should exercise extreme caution and really should be quite skeptical before they too readily make cryptocurrency available as an investment option,” the agency’s Acting Assistant Secretary Ali Khawar said Thursday.

Speaking to the American Academy of Actuaries Thursday, Khawar said the agency’s guidance and enforcement effort is the first step toward providing an adequate response to the emerging asset class.

President Joe Biden on Wednesday signed an executive order coalescing federal regulators behind a unified strategy for establishing cryptocurrency consumer protections.

Eyes Open?

Digital coins present a unique set of challenges that can harm workplace retirement plan participants unless fiduciaries in charge of those plans aren’t careful about the way they communicate. It’s critical that the agency “get it right,” Khawar said.

“What exactly is the message that participants are receiving if they see cryptocurrency on their core investment lineup?” he asked. “Are they receiving messages about the security and appropriateness of those investment options? It wasn’t clear to us that the fiduciaries that are making those decisions are going into them with their eyes fully open.”

As of 2019, about 91 million 401(k) plan participants held an estimated $6.2 trillion in retirement assets, according to the Labor Department. Cryptocurrencies aren’t commonplace in most defined-contribution investment lineups, but that could change as a burgeoning tech-based 401(k) market seeks ways to target their products to retail investors.

Low-cost 401(k)-provider ForUsAll Inc. partnered with the nation’s largest digital currency exchange platform Coinbase Global Inc. last year 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.

(Updated with additional reporting throughout)

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

To contact the editors responsible for this story: Andrew Harris at aharris@bloomberglaw.com; Martha Mueller Neff at mmuellerneff@bloomberglaw.com