It started sometime last year and, in hindsight, was inevitable.  Clients with 401(k) plans and a crypto-savvy employee population began asking whether they could offer cryptocurrency as a plan investment option.  In the 401(k) world, where even a self-directed brokerage window with built-in investment limitations can be too risky, the answer seemed obvious – watch out!  Cryptocurrency is notoriously volatile and, quite frankly, confusing for many investors.  For that reason, it doesn’t seem to pair well with 401(k) retirement planning, where plan fiduciaries are charged with choosing investments that balance long-term growth with a certain level of stability and reasonable fees.

Cryptocurrencies were first introduced in 2009 when Bitcoin software was released.  While there are many forms of cryptocurrency, they generally use blockchain technology and cryptography to secure transactions.  Likely due to the anonymity of transactions, the currency became attractive in the online black market, facilitating transactions for illegal drugs and false IDs.  It is also the currency of choice for threat actors, making seven-figure, sometimes eight-figure demands in connection with ransomware and other attacks.  However, some years later, Bitcoin, Ethereum, and other cryptocurrencies became more mainstream, valuations rose, and markets for trading these currencies emerged, such as Coinbase.

Soon, the idea of offering cryptocurrencies as an investment option in a 401(k) plan gained traction.  After all, nothing under ERISA or the Internal Revenue Code expressly prohibits cryptocurrency from being included as a 401(k) plan investment option.  The Department of Labor is now weighing in, however, and recently released Compliance Assistance Release No. 2022-01 (Release), in which it “cautions plan fiduciaries to exercise extreme care before they consider adding cryptocurrency to a 401(k) plan’s investment menu for plan participants”.

The Release expresses concern about the prudence of a fiduciary’s decision to expose participants to either direct investments in cryptocurrencies or other products tied to the value of cryptocurrencies for the following reasons:

  1. cryptocurrencies are highly speculative and volatile, which can have a devasting effect on participants—in particular those close to retirement;
  2. cryptocurrency is still new and can be confusing for plan participants who are hearing the anecdotes of big returns without necessarily understanding the risks involved;
  3. there are custodial and recordkeeping concerns since cryptocurrencies general exist as lines of computer code in a digital wallet, rather than in trust and custodial accounts like traditional 401(k) plan assets;
  4. there are concerns about the reliability and accuracy of cryptocurrency valuations—the methodology for which is still contested; and
  5. cryptocurrency regulation is still in flux—the Release provides the example that some cryptocurrency sales may constitute the unlawful sale of securities in unregistered transactions.

The Release further indicates that the DOL expects to conduct an investigative program aimed at plans offering investments in cryptocurrency and related products and to “take appropriate action to protect the interests of plan participants and beneficiaries” regarding cryptocurrency investments.  Plan fiduciaries are put on notice that they must be ready to “square their actions with their duties of prudence and loyalty” in light of the risks set out by the Release.

The stakes are high when plan fiduciaries make investment choices in any scenario, since a breach of their duties to, as the Release puts it, “act solely in the financial interests of plan participants and adhere to an exacting standard of professional care” can lead to personal liability for any losses to the plan resulting from that breach.

This isn’t to say that cryptocurrency won’t eventually be accepted as a prudent 401(k) plan investment option.  But, for now, it’s probably wise for plan fiduciaries to hit the pause button.

If you have any questions about compliance or litigation issues, the members of the Jackson Lewis Employee Benefits and ERISA Complex Litigation Practice groups are available to assist.  Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

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Photo of Kellie M. Thomas Kellie M. Thomas

Kellie M. Thomas’ goal with every client is to provide practical and straightforward advice that breaks down and makes accessible the myriad issues and considerations arising under ERISA, the Internal Revenue Code (including Sections 280G, 401(k), 403(b), 409A and 457(b) and (f)), the…

Kellie M. Thomas’ goal with every client is to provide practical and straightforward advice that breaks down and makes accessible the myriad issues and considerations arising under ERISA, the Internal Revenue Code (including Sections 280G, 401(k), 403(b), 409A and 457(b) and (f)), the Affordable Care Act, COBRA, HIPAA, and the various other federal and state laws and regulations affecting benefit plans.

As part of her day to day advice and counsel work, Kellie regularly reviews, drafts and amends self- and fully-insured health and welfare plans; cafeteria plans; qualified and non-qualified retirement plans; employment, consulting, severance and change in control agreements; and stock option and other equity-based compensation plans. She drafts and prepares submissions under the Internal Revenue Service’s Employee Plans Compliance Resolution System and the Department of Labor’s Voluntary Fiduciary Correction Program, and reviews and qualifies proposed Qualified Domestic Relations Orders and Qualified Medical Child Support Orders. Kellie also counsels on corporate governance and fiduciary matters, including the structure and duties of retirement and benefit plan committees.

Photo of Joseph J. Lazzarotti Joseph J. Lazzarotti

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP)…

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP) with the International Association of Privacy Professionals. Trained as an employee benefits lawyer, focused on compliance, Joe also is a member of the firm’s Employee Benefits practice group.

In short, his practice focuses on the matrix of laws governing the privacy, security, and management of data, as well as the impact and regulation of social media. He also counsels companies on compliance, fiduciary, taxation, and administrative matters with respect to employee benefit plans.

Privacy and cybersecurity experience – Joe counsels multinational, national and regional companies in all industries on the broad array of laws, regulations, best practices, and preventive safeguards. The following are examples of areas of focus in his practice:

  • Advising health care providers, business associates, and group health plan sponsors concerning HIPAA/HITECH compliance, including risk assessments, policies and procedures, incident response plan development, vendor assessment and management programs, and training.
  • Coached hundreds of companies through the investigation, remediation, notification, and overall response to data breaches of all kinds – PHI, PII, payment card, etc.
  • Helping organizations address questions about the application, implementation, and overall compliance with European Union’s General Data Protection Regulation (GDPR) and, in particular, its implications in the U.S., together with preparing for the California Consumer Privacy Act.
  • Working with organizations to develop and implement video, audio, and data-driven monitoring and surveillance programs. For instance, in the transportation and related industries, Joe has worked with numerous clients on fleet management programs involving the use of telematics, dash-cams, event data recorders (EDR), and related technologies. He also has advised many clients in the use of biometrics including with regard to consent, data security, and retention issues under BIPA and other laws.
  • Assisting clients with growing state data security mandates to safeguard personal information, including steering clients through detailed risk assessments and converting those assessments into practical “best practice” risk management solutions, including written information security programs (WISPs). Related work includes compliance advice concerning FTC Act, Regulation S-P, GLBA, and New York Reg. 500.
  • Advising clients about best practices for electronic communications, including in social media, as well as when communicating under a “bring your own device” (BYOD) or “company owned personally enabled device” (COPE) environment.
  • Conducting various levels of privacy and data security training for executives and employees
  • Supports organizations through mergers, acquisitions, and reorganizations with regard to the handling of employee and customer data, and the safeguarding of that data during the transaction.
  • Representing organizations in matters involving inquiries into privacy and data security compliance before federal and state agencies including the HHS Office of Civil Rights, Federal Trade Commission, and various state Attorneys General.

Benefits counseling experience – Joe’s work in the benefits counseling area covers many areas of employee benefits law. Below are some examples of that work:

  • As part of the Firm’s Health Care Reform Team, he advises employers and plan sponsors regarding the establishment, administration and operation of fully insured and self-funded health and welfare plans to comply with ERISA, IRC, ACA/PPACA, HIPAA, COBRA, ADA, GINA, and other related laws.
  • Guiding clients through the selection of plan service providers, along with negotiating service agreements with vendors to address plan compliance and operations, while leveraging data security experience to ensure plan data is safeguarded.
  • Counsels plan sponsors on day-to-day compliance and administrative issues affecting plans.
  • Assists in the design and drafting of benefit plan documents, including severance and fringe benefit plans.
  • Advises plan sponsors concerning employee benefit plan operation, administration and correcting errors in operation.

Joe speaks and writes regularly on current employee benefits and data privacy and cybersecurity topics and his work has been published in leading business and legal journals and media outlets, such as The Washington Post, Inside Counsel, Bloomberg, The National Law Journal, Financial Times, Business Insurance, HR Magazine and NPR, as well as the ABA Journal, The American Lawyer, Law360, Bender’s Labor and Employment Bulletin, the Australian Privacy Law Bulletin and the Privacy, and Data Security Law Journal.

Joe served as a judicial law clerk for the Honorable Laura Denvir Stith on the Missouri Court of Appeals.