Employees and retirees have begun to press their employers to include cryptocurrency among available 401(k) investment options. The Employee Benefits Security Administration (EBSA) recently warned it will scrutinize such investments to make sure plans maintain proper oversight. EBSA further cautioned plan sponsors to be extremely careful when deciding whether and how to incorporate cryptocurrency as an investment option.
EBSA’s informal guidance does not bar 401(k) plans from including crypto, but it does mean plan fiduciaries will need to conduct a thorough evaluation before offering it. Further, plan sponsors should anticipate EBSA investigating if a plan includes such an option. What do employers need to know about the recent guidance, and what should they do if weighing cryptocurrency-based 401(k) investments?
Background
President Biden recently issued an Executive Order outlining a national digital asset policy that calls on federal regulators to emphasize consumer and investor protection in the cryptocurrency space. Almost immediately, EBSA issued Compliance Assistance Release No. 2022-01 (Release) in which it reminded plan fiduciaries of their duty to act solely in the financial interests of plan participants. The guidance included a candid warning that the EBSA expects to launch a program targeting plans that offer participant investments in
cryptocurrencies and crypto-related products, and to take “appropriate action” to protect plan participants and beneficiaries. We cannot speculate as to the scope of the program or the severity of related penalties, but plan sponsors undoubtedly should act cautiously in this space.
EBSA’s Authority
Pursuant to the Employee Retirement Income Security Act of 1974 (ERISA), EBSA can investigate employee benefit plans to protect the interests of plan participants and beneficiaries. EBSA has the power to subpoena documents and to compel the attendance and testimony of witnesses. Further, if EBSA believes that plan fiduciaries have violated their fiduciary duties or engaged in prohibited transactions, it can refer the matter to the Department of Labor’s Solicitor’s Office to file a federal civil suit for monetary and injunctive relief. EBSA also conducts investigations of potential criminal violations of ERISA, which the Department of Justice can prosecute.
Retirement plan fiduciaries owe the duties of skill, prudence, and diligence to plan participants and beneficiaries and, for example, must diversify a menu of investment options offered in a 401(k) plan. In addition, the Supreme Court in Hughes v. Northwestern University recently reminded plan fiduciaries of their continuing duty to monitor 401(k) plan investments and to remove any imprudent investment options. An investment can be imprudent for several reasons, including undue risk and excessive fees and costs.
EBSA highlighted several focal points including the volatility, valuation complexities, and unique custody and recordkeeping aspects of digital assets compared to more traditional investments. It also expressed concern that plan participants may not be equipped to make informed investment decisions regarding digital assets such as cryptocurrencies. Given these statements, EBSA’s investigations will likely evaluate the prudence of digital assets, including cryptocurrencies, as possible 401(k) plan options.
Plan sponsors should keep in mind that EBSA can initiate an investigation based on complaints from participants or service providers, media reports, and data collected from annual plan filings. EBSA will also conduct investigations pursuant to specific enforcement initiatives that focus on a particular area of concern – like cryptocurrency. Moreover, EBSA can expand its investigation beyond a single benefits plan, and can include service providers in its review. If, upon investigation, EBSA believes that a particular digital asset investment option in a 401(k) plan is imprudent, the Solicitor’s Office may file a lawsuit against the fiduciaries of the plan in federal court. EBSA also issues civil monetary penalties equal to 20% of any money recovered. In addition, fiduciaries who breach their duties of professional care can be held personally liable for any losses to the plan resulting from the breach.
What to do now
Employers or financial institutions that offer cryptocurrencies under 401(k) plans should thoroughly weigh the risks and benefits of doing so. As with all investment options, employers and other fiduciaries should continue to monitor and evaluate the prudence of each cryptocurrency included as investment options. Lastly, whether you are an employer, fiduciary, or a service provider to a 401(k) plan, you should immediately seek the assistance of legal counsel if you receive a letter or subpoena from EBSA.
This information has been prepared for UBA by Fisher & Phillips LLP. It is general information and provided for educational purposes only. It is not intended to provide legal advice. You should not act on this information without consulting legal counsel or other knowledgeable advisors.
