The Employee Benefits Security Administration (EBSA) recently released Compliance Assistance Release No. 2022-01, which advised 401(k) plan fiduciaries to be cautious before adding a cryptocurrency option to the plan’s investment menu. Part of a fiduciary’s duty includes ensuring that available investment options are prudent. Relying on a recent decision by the Supreme Court, the guidance emphasized that fiduciaries cannot shift responsibility to plan participants to identify and avoid imprudent investment options, but rather must curate a menu of prudent options. A fiduciary that offers or fails to remove an imprudent investment option has breached his or her duty.
The guidance continues by describing the Department’s serious concerns about cryptocurrencies’ significant risks of fraud, theft, and loss. Cryptocurrencies have been subject to extreme price volatility, which can have a severe impact on participants approaching retirement. Fiduciaries may face custodial and recordkeeping issues because cryptocurrencies are not held like traditional plan assets in trust or custodial accounts. Experts have not come to a consensus on how to appropriately value cryptocurrencies and cryptocurrency market intermediaries may not adopt consistent accounting processes, so valuations of cryptocurrencies are unreliable. Lastly, the excitement and publicity around cryptocurrency may attract investments from unexperienced participants who have less knowledge about cryptocurrency compared to traditional investments, do not understand the risks, and expect unattainably high returns.
The guidance warns that EBSA intends to conduct investigations aimed at retirement plans that offer participant investments in cryptocurrencies and would expect a clear explanation regarding how fiduciaries are not violating their duties of prudence and loyalty in light of the risks.