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17 March 2022

Ropes & Gray LLP

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On March 11, 2022, the U.S. Department of Labor (DOL) publishedCompliance Assistance Release No. 2022-01 (CAR 2022-01) in order toprovide guidance for 401(k) plan fiduciaries who are consideringplan investments in cryptocurrencies. The strongly worded statementreveals the agency's heightened level of concern surroundingcryptocurrency as plan investments, with the DOL cautioningfiduciaries to "exercise extreme care" before theyconsider adding a cryptocurrency option to a 401(k) plan lineup forplan participants. Although CAR 2022-01 was released just one dayafter President Biden signed an Executive Order outlining awhole-government strategy to ensure responsible innovation indigital assets, the use of cryptocurrency in 401(k) plan lineupshas been on the DOL's radar at least since the summer of 2021.At that time, there were statements from the Acting AssistantSecretary for the DOL's Employee Benefits SecurityAdministration (EBSA) that the agency viewed the use ofcryptocurrencies in the retirement plan context as a "verytroubling" development given its high volatility and limitedtransparency.1

According to CAR 2022-01, the DOL's concerns about theprudence of a fiduciary's decision to expose a 401(k)plan's participants to direct investments in cryptocurrenciesor other products whose value is tied to cryptocurrencies stem fromthe significant risks of fraud, theft and loss that have beenendemic to these asset classes at least as of this early stage intheir evolution. CAR 2022-01 elaborates on several aspects ofcryptocurrencies that are at the heart of the DOL'sapprehensions:

CAR 2022-01 concludes by indicating that EBSA expects to conductan investigative program aimed at plans that offer participantinvestments in cryptocurrencies and related products, and to takeappropriate action to protect the interests of plan participantsand beneficiaries with respect to these investments. Furthermore,as part of this probe, the DOL will examine how plan fiduciariesresponsible for overseeing such investment options or allowing suchinvestments through brokerage windows are satisfying their dutiesof prudence and loyalty under ERISA in light of the significantconcerns the DOL articulates in CAR 2022-01.

While there has been increasing demand on the part of individualinvestors to add cryptocurrency exposure to their retirementaccounts,2the DOL's unequivocal position inCAR 2022-01 on the riskiness of cryptocurrencies as plan investmentoptions will likely have a chilling effect on this nascent market.That said, CAR 2022-01 focuses on the use of cryptocurrencies in401(k) plans-how exactly the agency's position will apply tothe defined benefit plan space is unclear. Additionally, theguidance appears to home in on a 401(k) plan fiduciary'sdecision to expose participants to direct investments incryptocurrencies. Whether some of the agencies' concerns can bemitigated by indirect investments in funds that have cryptocurrencyexposure-perhaps even minimal exposure that would be subject to astrict cap-is also unclear at this time.

While the DOL has not created a flat prohibition on offering401(k) participants exposure to cryptocurrency and digital assets,in light of the DOL's strong wording and warning of newinvestigative efforts, plan fiduciaries who remain interested inpursuing these investment options are advised to exercise a veryhigh level of care in all decision-making, and to producesufficient documentation of that decision-making process.

Footnotes

1. Ted Godbout, "Khawar: Cryptocurrency Guidance onthe Horizon" National Association of Plan Advisors, July 28,2021, available athttps://www.napa-net.org/news-info/daily-news/khawar-cryptocurrency-guidance-horizon.

2. Anne Tergesen, "Saving for Retirement? Now YouCan Bet on Bitcoin," Wall Street Journal, June 25, 2021,available athttps://www.wsj.com/articles/saving-for-retirement-now-you-can-bet-on-bitcoin-11624613435.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

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