DOL says cool it on crypto in 401(k)s

You’d be forgiven if you haven’t noticed the ongoing criminal fraud trial of Sam Bankman-Fried, the cryptocurrency wunderkind. His crypto exchange, FTX, collapsed, leaving behind a long line of unsecured creditors.

Cryptocurrency isn’t legal tender—you can’t walk into your supermarket and buy groceries with it. It isn’t regulated by the Fed or the SEC, which makes it risky. This should give you pause if you’re considering allowing your 401(k) plan to offer a crypto investment option.

Decrypting crypto

Cryptocurrency, despite its shortcomings, makes an attractive investment because the returns can be enormous, if you know what you’re doing. However, the Department of Labor, along with the SEC, has concluded that most people don’t know what they’re doing. So in March 2022, the DOL issued guidance cautioning employers about offering a crypto investment option in their 401(k) plans.

The DOL’s guidance took the form of a Compliance Assistance Release; it didn’t bother taking the long route—the regular notice and comment procedures—that precede the release of regulations. At the same time, the DOL said it will investigate plans offering crypto options. So it seemed the CAR had some teeth.

HR Forms D

This kicked off a lawsuit filed by ForUsAll, Inc., which says it’s “the first 401(k) platform to provide access to cryptocurrency.” Its beefs:

It had three causes of action:

  • It was injured when potential clients backed away from negotiations after the CAR was released.
  • The DOL should have issued this guidance in regulatory form.
  • Even if the DOL did propose regulations, it acted arbitrarily and capriciously when it established a standard of extreme care, instead of prudence, for plan fiduciaries.

This lawsuit has been bouncing around since June 2022. Last December, the DOL filed a motion to dismiss. A federal trial court has now granted this motion.

Trial court: ForUsAll lacks standing to sue (i.e., it wasn’t injured) because it’s highly speculative whether the requested relief would redress the injuries it alleged. The DOL didn’t act arbitrarily and capriciously, the court continued, because the CAR isn’t a final agency action, so it’s not reviewable.

Not the final word?

Should prudent 401(k) plan fiduciaries interpret the court’s “not the final word” as meaning the DOL will start the regulatory process? It’s anyone’s guess. Where does this leave you if you have employees who are clamoring for a crypto investment option?

ERISA requires plan fiduciaries to exercise prudence in selecting investments. Fiduciaries also have a continuing duty to monitor investments and remove imprudent ones. Considering all the issues surrounding crypto, it may be prudent to avoid offering crypto investment options.

You could mollify employees who want such an option by allowing them to invest in crypto through a brokerage window.

What is it? A brokerage window allows employees to invest their account balances in a variety of investments beyond the menu of designated investment alternatives offered directly by the plan. There is generally less plan supervision of brokerage windows.

But this isn’t a slam dunk. There’s an open question regarding whether there is a fiduciary obligation to employees who invest through brokerage windows and, if there is, what the extent of this obligation is.

The DOL, for its part, has expressed a special interest in brokerage windows through which employees can invest in crypto.

How risky is crypto? This risky

Voyager Digital LLC, a crypto-based financial services provider, touted its products as having FDIC protection. The FDIC doesn’t cover crypto, so when Voyager folded, investors lost their real money.

The bogus claim of FDIC protection caught the FTC’s eye. The FTC has announced a settlement under which Voyager and its affiliated companies have agreed to a permanent ban from offering, marketing or promoting any products or services that could be used to deposit, exchange, invest or withdraw any assets.