DOL issues release targeting crypto as an investment option in participant directed 401(k) plans

On March 10, 2022, the Department of Labor released Compliance Assistance Release No. 2022-01 401(k) “Plan Investments in ‘Cryptocurrencies.” The CAR generally cautions against 401(k) plans including “cryptocurrencies” (and other “digital assets” including “tokens,” “coins,” “crypto assets,” and “derivatives thereof”) in a 401(k) plan fund menu or brokerage window. In this article we briefly review the CAR.

Restatement of ERISA fiduciary law

The CAR begins with a restatement of what is generally considered to be basic ERISA fiduciary law:

ERISA fiduciaries “must act solely in the financial interests of plan participants” and adhere to “prudence and loyalty obligations.” And the “consideration of whether to include an option [e.g., in a 401(k) plan fund menu) for participants to invest in cryptocurrencies is subject to these exacting responsibilities.”

In a participant directed defined contribution plan, “fiduciaries have an obligation to ensure the prudence of the options [in the plan’s fund menu] on an ongoing basis.” In this regard, they must “evaluate the designated investment alternatives made available to participants and take appropriate measures to ensure that they are prudent.”

Summary of issues presented by crypto investments

The CAR then summarizes the issues DOL sees with the inclusion of crypto investments in a participant directed DC plan fund menu:

Crypto is a speculative and volatile investment: This extreme volatility “can have a devastating impact on participants, especially those approaching retirement and those with substantial allocations to cryptocurrency.”

Participants are generally unable to evaluate crypto investments:[I]t can be extraordinarily difficult, even for expert investors, to evaluate these assets and separate the facts from the hype.” Compared to “traditional investments,” participants are less likely to have the necessary knowledge or expertise to evaluate a crypto investment. Moreover, inclusion by fiduciaries of a crypto investment in a plan fund menu constitutes, in effect, endorsement of that investment as prudent.

Custody and recordkeeping issues: Crypto is generally not custodied like, e.g., stocks or bonds. With some crypto, when the password is lost the crypto asset is lost, and some crypto may be vulnerable to theft/hacking.

Valuation: According to experts: “none of the proposed models for valuing cryptocurrencies are as sound or academically defensible as traditional discounted cash flow analysis for equities or interest and credit models for debt.” And there may be problems with pricing determined by intermediaries.

Regulatory issues: DOL believes that “some market participants may be operating outside of existing regulatory frameworks or not complying with them,” e.g., “the sale of some cryptocurrencies could constitute the unlawful sale of securities in unregistered transactions.” And some crypto has been used in illegal activity which could result in the shutdown of platforms or exchanges. Fiduciaries considering crypto for a DC plan fund menu will have to evaluate these regulatory compliance issues.

DOL is launching a special crypto investigation initiative

DOL “expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments.”

Crypto in a brokerage window presents these same issues and will also be subject to investigation

The foregoing analysis and cautions seem to apply to “designated investment alternatives” in a participant directed DC plan. It is generally understood that investment options in a brokerage window (which often number in the thousands) are not “designated investment alternatives.” Nevertheless, the last sentence of the CAR states that, with respect to crypto at least, they do:

The plan fiduciaries responsible for overseeing such investment options or allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks described above. (Emphasis added.)

Takeaways for sponsors

There are a number of problems with DOL’s crypto CAR (see below), but the main takeaway is clear: DOL intends to target sponsors offering crypto in either a participant directed DC plan fund menu or brokerage window. Sponsors considering doing so should weigh the risk of an investigation, audit, and litigation carefully.

The CAR breaks new ground in at least two respects. First, it is (more or less) axiomatic that ERISA does not prohibit any particular sort of investment but simply requires prudent diversification. Nevertheless, DOL seems to be saying that (at the current time at least, in its view), offering crypto in a fund menu is not prudent.

Second, DOL has for some time (somewhat reluctantly) recognized that investments offered in a brokerage window are not subject to the “scrutiny for prudence” that is required for a “designated investment alternative.” Brokerage windows may, indeed, include publicly traded stocks and thousands of mutual funds – it is (obviously) practically impossible to evaluate the prudence of all of these investments. Nevertheless, in the CAR DOL suggests that offering crypto in a brokerage window is “subject to duties of prudence and loyalty.”

It’s not clear how far the CAR, and the threatened investigations, reach: Do similar concerns apply outside participant directed DC plans, e.g., with respect to defined benefit plans? Do similar concerns apply to, e.g., stock in companies providing services to the crypto “community?”

What other investments might DOL’s analysis here apply to? We certainly have seen a number of speculative bubbles in the last two decades, many of which have not ended well for enthusiastic investors.

Finally, is this the right way to go about dealing with the issues presented by highly speculative investments – in effect, regulation by news release, without the opportunity for comment and stakeholder feedback that the formal regulatory process provides?

This is a publication of O3 Plan Advisory Services. If you have any comments or have questions about regulatory developments, please contact your relationship manager or Mike Barry at  The information, analyses and opinions set out herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Nothing herein constitutes or should be construed as a legal opinion or advice. You should consult your own attorney, accountant, financial or tax advisor or other planner or consultant with regard to your own situation or that of any entity which you represent or advise. Information set out or referred to above has been obtained from sources believed to be reliable. However, neither O3 Plan Advisory Services nor any of its affiliates has verified the accuracy or completeness of any such information. All information is provided “as is” and O3 Plan Advisory Services and its affiliates expressly disclaim all express and implied warranties regarding the information. Neither O3 Plan Advisory Services nor any of its affiliates shall have any liability for any use of the information set out or referred to herein.