Kabir Hemrajani took the plunge in 2020. He rolled over the entirety of an old 401(k) into a new kind of individual retirement account he’d heard about—a crypto IRA.
Now, the 42-year-old Boston-area video game developer said he’s lost more than two-thirds of his principal investment worth tens of thousands of dollars. But Hemrajani isn’t worried.
“I’ve been through enough boom and bust cycles of crypto that I would expect, over the next 20 years, when I want that IRA to go up that it will go up significantly,” he said in an interview.
Hemrajani is part of a new generation of retirement investors so committed to the prospect of lavish cryptocurrency returns that they’re willing to venture outside the confines of a workplace plan into the enigmatic and vaguely regulated world of digital IRAs.
Federal regulators, though, aren’t giving up without a fight. The US Labor Department has pushed back hard against crypto investing in 401(k)s and is ramping up a decades-old investment advice rulemaking project that could extend those protections into the digital IRA market.
That’s a risky gamble. The department could emerge with more regulatory tools to crack down on companies enticing retirement investors away from their workplace plans. That hardline crypto approach, though, could backfire, forcing even more workers to abandon 401(k)s to get access to a tax-advantaged asset they can only get with digital IRAs.
“Escaping regulation for rollovers is not a trivial matter,” said Jasmin Sethi, CEO of Sethi Clarity Advisers LLC and associate director of policy research at
Two Evolving Fronts
Digital IRA providers operate in a regulatory gray zone, said Sethi. IRAs have lower contribution limits, meaning 401(k) savers can save roughly three times as much tax-preferred money.
Senior DOL officials told Bloomberg Law that’s a worrisome disparity, especially if 401(k) participants leave the safety of their workplace plans in hopes of a get-rich-quick IRA.
The department’s primary focus “is on these entities that are promoting investments in cryptocurrency assets,” Ali Khawar, acting DOL assistant secretary for employee benefits, said in an interview. “A big part of our focus would be on the rollover and what kind of conversations, what kind of communications, what kind of advice are those promoters actually providing to individuals to get them, to take their money out of the 401(k) space and put it in a IRA.”
The DOL’s Employee Benefits Security Administration had been mostly silent on cryptocurrency investing until earlier this year. In the months since it issued guidance strongly objecting to digital currency in 401(k)s, all signs have pointed to a more wholesale regulatory approach to crytpo investing across the retirement industry.
“The whole point has been on extending controls into the IRA market,” said Matthew Eickman, national retirement practice leader at Prime Capital Investment Advisors LLC-operated Qualified Plan Advisors.
The project is evolving on two fronts. On the one hand, the agency says it’s launching an “investigative program” aimed at 401(k) plans that allow investors to access crypto (CAR No. 2022-01); on the other, the department is retooling its definition of fiduciary investment advice to capture companies helping workers and retirees leaving an employer-sponsored 401(k).
When a worker transitions from a workplace plan to an IRA, they’re stepping outside the DOL’s traditional authority under Employee Retirement Income Security Act of 1974 (Pub.L. 93-406). Precisely when that authority ends has been the subject of fierce political fighting dating back to the Obama administration, when a rule broadening the definition of fiduciary advice was vacated by a federal circuit court.
“The core commonality of all of those was, ‘We want to extend ERISA’s reach so that fiduciary obligations are applying to the IRA marketplace in a way that previously they haven’t been perceived to apply,’” said Brad Campbell, former DOL assistant secretary for employee benefits and a partner at Faegre Drinker Biddle & Reath LLP in Washington.
Digital IRAs are self-directed accounts that let participants steer their investments. Companies say that means the IRA providers are then off the hook as fiduciary investment advisers, no matter the DOL’s intent.
Labor regulators’ hard-line stance on cryptocurrency investing is only steering workplace investors hungry to capitalize on crypto returns into the IRA market, said Brenda Whitman, CEO of Coin IRA LLC, a Los Angeles-based digital IRA provider.
“This is 100% a market opportunity,” Whitman said. “These types of laws and restrictions could diminish participation in 401(k)s in favor of contributing to an IRA where the account holder does have control and does have a wider menu of options to choose from that includes cryptocurrency.”
Since the department issued its guidance in March, digital IRAs have flooded the internet with advertisements claiming “your 401(k)’s investment options are boring.” The top sponsored search results for the keywords “401(k) cryptocurrency” are from digital IRA providers.
“There’s always been this underlying interest from folks to get out of their 401(k)s and do something different,” said Chris Kline, co-founder and chief revenue officer at Bitcoin IRA. Kline, too, said his company is intentionally designed as a fintech organization that doesn’t provide financial advice.
Companies have published step-by-step instructions online telling participants how to roll their 401(k) into an IRA without triggering IRS tax penalties. Of the companies Bloomberg Law interviewed, between 30% and 50% of total capital investments originated from the employer-sponsored space, but many investors opt to keep their 401(k)s to create a more diversified portfolio.
Whether a company calls itself an investment adviser may not actually matter in the end.
“Whether or not someone’s calling themselves a financial adviser maybe matters more for other laws than it does for us,” Khawar said.