A Warning from the Department of Labor (DOL) has been recently released, cautioning against the inclusion of cryptocurrencies in 401(k) plans. The Warning highlights various concerns, such as potential challenges to fiduciary responsibilities relating to brokerage windows and the appropriateness of specifically targeting certain asset classes by the DOL.
The controversial discussion surrounding the risks and benefits of cryptocurrency in investment portfolios is currently taking place across various platforms. This debate has now gained significant attention in regards to including cryptocurrency as an investment choice in 401(k) plans.
President Biden issued an “Executive Order on Ensuring Responsible Development of Digital Assets” (the Executive Order) on 9 March 2022. The Executive Order outlines policy objectives that aim to safeguard consumers, investors, and businesses in the United States, as well as protect both national and global financial stability by addressing systemic risk. It also strives to mitigate the potential risks associated with the illicit use of digital assets, focusing on both financial and national security concerns. Furthermore, the Executive Order emphasizes the importance of maintaining the United States’ leadership position in the global financial system, promoting accessibility to secure and affordable financial services, and supporting technological advancements that encourage the responsible development and utilization of digital assets.
Compliance Assistance Release No. 2022-01, titled “401(k) Plan Investments in ‘Cryptocurrencies’,” was issued by the DOL one day after President Biden issued the Executive Order. This Release deviates from the norm by expressing the DOL’s disfavor towards cryptocurrency as a potential plan investment. Typically, the DOL remains unbiased towards specific asset classes, acknowledging that fiduciaries have a responsibility to evaluate investment options based on individual circumstances. While the Executive Order aims to balance consumer protection, risk mitigation, and equal enjoyment of financial innovation among all Americans, the Release presents a more one-sided perspective.
The Release highlights various risks and challenges associated with cryptocurrency that retirement account participants may face, including its speculative and unpredictable nature, complexity, valuation challenges, custodial and recordkeeping issues, and the ever-changing regulatory landscape. It should be noted that these risks are not exclusive to this particular asset class. However, the Release lacks a balanced discussion regarding the potential benefits to a retirement investor if they include a limited portion of cryptocurrency in their portfolio, as a fiduciary may also consider these advantages.
The main focus of the Release is to warn fiduciaries against including cryptocurrency as an investment option in a 401(k) plan’s investment menu. However, the DOL also cautions fiduciaries who permit investments in cryptocurrency through brokerage windows that they should anticipate being questioned about how their actions align with their obligations of prudence and loyalty. The mention of brokerage windows raises additional concerns. It is the fiduciary’s duty to prudently select and monitor a brokerage window provider, just as they would with any other plan service provider. However, investments made through a brokerage window are not considered “designated investment options,” and therefore the fiduciary’s responsibilities towards such investments are typically limited.
When contemplating the inclusion of cryptocurrency in 401(k) plans, plan fiduciaries should exercise caution and follow a prudent approach, similar to assessing any other type of investment. It is crucial for plan fiduciaries to gather all pertinent information, taking into account the described risks and challenges in the Release, carefully analyze the relevant information, seek advice from experts when needed, and adequately document their decision-making process.
The DOL’s focus on a specific asset class, as stated in the Release, raises several concerns. According to ERISA, fiduciaries must follow a legal standard to evaluate the suitability of investments for specific plans. Moreover, the implications of the Release regarding brokerage windows are worrisome. It is not feasible and contradicts existing guidance to hold plan fiduciaries accountable for investments made through brokerage windows. We anticipate that the industry will object to the Release.
FACT SHEET: President Biden to Sign Executive Order on Ensuring Responsible Development of Digital Assets
In recent years, there has been a significant increase in the value of digital assets, such as cryptocurrencies, which exceeded a market cap of $3 trillion in November last year, compared to $14 billion just five years earlier. Research suggests that approximately 40 million adult Americans, or around 16 percent of the population, have engaged in cryptocurrency investments, trading, or usage. Moreover, over 100 countries are currently exploring or piloting Central Bank Digital Currencies (CBDCs), which are digital versions of their sovereign currencies. This growth in digital assets presents an opportunity for the United States to strengthen its position in the global financial system and technological advancements. However, it also raises concerns regarding consumer protection, financial stability, national security, and climate risks. To address these issues, the United States must maintain its technological leadership in this rapidly expanding field, promoting innovation while mitigating risks for consumers, businesses, the financial system as a whole, and the environment. Additionally, the country should take a leading role in international engagement and global governance of digital assets, ensuring alignment with democratic values and maintaining competitiveness. In light of these objectives, President Biden plans to sign an Executive Order that establishes a comprehensive approach, involving the entire government, to address the risks and harness the potential benefits of digital assets and their underlying technology. This Order outlines a national policy for digital assets, focusing on six key priorities: protecting consumers and investors, maintaining financial stability, combating illicit financial activities, ensuring U.S. leadership in the global financial system and economic competitiveness, promoting financial inclusion, and encouraging responsible innovation.
The Executive Order specifically requires actions to be taken in order to:
- Protect U.S. Consumers, Investors, and Businesses by directing the Department of the Treasury and other agency partners to assess and develop policy recommendations to address the implications of the growing digital asset sector and changes in financial markets for consumers, investors, businesses, and equitable economic growth. The Order also encourages regulators to ensure sufficient oversight and safeguard against any systemic financial risks posed by digital assets.
- Protect U.S. and Global Financial Stability and Mitigate Systemic Risk by encouraging the Financial Stability Oversight Council to identify and mitigate economy-wide (i.e., systemic) financial risks posed by digital assets and to develop appropriate policy recommendations to address any regulatory gaps.
- Mitigate the Illicit Finance and National Security Risks Posed by the Illicit Use of Digital Assets by directing an unprecedented focus of coordinated action across all relevant U.S. Government agencies to mitigate these risks. It also directs agencies to work with our allies and partners to ensure international frameworks, capabilities, and partnerships are aligned and responsive to risks.
- Promote U.S. Leadership in Technology and Economic Competitiveness to Reinforce U.S. Leadership in the Global Financial System by directing the Department of Commerce to work across the U.S. Government in establishing a framework to drive U.S. competitiveness and leadership in, and leveraging of digital asset technologies. This framework will serve as a foundation for agencies and integrate this as a priority into their policy, research and development, and operational approaches to digital assets.
- Promote Equitable Access to Safe and Affordable Financial Services by affirming the critical need for safe, affordable, and accessible financial services as a U.S. national interest that must inform our approach to digital asset innovation, including disparate impact risk. Such safe access is especially important for communities that have long had insufficient access to financial services. The Secretary of the Treasury, working with all relevant agencies, will produce a report on the future of money and payment systems, to include implications for economic growth, financial growth and inclusion, national security, and the extent to which technological innovation may influence that future.
- Support Technological Advances and Ensure Responsible Development and Use of Digital Assets by directing the U.S. Government to take concrete steps to study and support technological advances in the responsible development, design, and implementation of digital asset systems while prioritizing privacy, security, combating illicit exploitation, and reducing negative climate impacts.
- Explore a U.S. Central Bank Digital Currency (CBDC) by placing urgency on research and development of a potential United States CBDC, should issuance be deemed in the national interest. The Order directs the U.S. Government to assess the technological infrastructure and capacity needs for a potential U.S. CBDC in a manner that protects Americans’ interests. The Order also encourages the Federal Reserve to continue its research, development, and assessment efforts for a U.S. CBDC, including development of a plan for broader U.S. Government action in support of their work. This effort prioritizes U.S. participation in multi-country experimentation, and ensures U.S. leadership internationally to promote CBDC development that is consistent with U.S. priorities and democratic values.
The Administration will persist in collaborating with agencies and Congress to create policies that protect against risks and promote responsible innovation. It will also work with allies and partners to build international capabilities that address national security risks, while partnering with the private sector to examine and endorse technological advancements in digital assets.
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