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 is co-leader of the firm’s Employee Benefits practice group. Her 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…

Kellie M. Thomas is co-leader of the firm’s Employee Benefits practice group. Her 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.

Kellie also has extensive experience advising on all benefits-related aspects of corporate transactions, from due diligence and transaction document negotiations to benefits integration following a closing. She particularly enjoys building relationships during the transaction process that continue after the deal is done.

Photo of Joseph J. Lazzarotti Joseph J. Lazzarotti

Joseph J. Lazzarotti is a principal in the Tampa, Florida, 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…

Joseph J. Lazzarotti is a principal in the Tampa, Florida, 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.