On September 12, 2022, the Department of Labor filed a motion to dismiss in ForUsAll, Inc. v. Walsh, a lawsuit by a 401(k) service provider challenging DOL’s March 10, 2022, “Compliance Assistance Release” (the “Release”) generally cautioning 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.
While much of the argument in DOL’s motion is technical (e.g., challenging ForUsAll’s standing to sue), DOL does say some interesting things in it, e.g., seeking to characterize the Crypto Release as a nonbinding restatement of settled interpretations.
In this note we briefly review the motion and DOL’s arguments.
The Crypto Release raised several issues with respect to crypto investments, especially where they are made available in participant-directed defined contribution plans, including: their speculative and volatile nature; the lack of participant expertise with respect to them; difficulties with respect to custody and recordkeeping; issues with respect to valuation; and the lack of a regulatory framework.
The Release has been controversial, especially for its concluding statement that “plan fiduciaries … allowing [crypto] 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 [in the Release].” Most sponsors and practitioners view fiduciaries as having no fiduciary obligation with respect to, or capacity to review, the thousands of investments typically offered through a brokerage window.
On June 2, 2022, ForUsAll, Inc. filed a complaint against DOL, alleging that, in issuing the Crypto Release, DOL had violated the Administrative Procedure Act (APA) in two respects: (1) DOL did not follow the APA’s required notice and comment process. And (2) DOL’s action was an “arbitrary and capricious attempt to restrict the use of cryptocurrency in defined contribution retirement plans, in excess of its authority under the [ERISA].”
DOL’s motion to dismiss
DOL filed a motion to dismiss this lawsuit on September 12, 2022. That motion comes in two parts:
First, DOL challenges the entire lawsuit on the basis that ForUsAll does not have standing.
Second, it challenges Claim (1) (failure to follow required APA notice and comment process) on the basis that the Crypto Release did not constitute a “final agency action” and was (at most) an interpretive rule exempt from the notice and comment requirement.
Both of these arguments are somewhat “technical.”
Briefly, the standing issue turns on (oversimplifying) whether ForUsAll was actually injured by the Crypto Release and whether the remedies plaintiff asks for – e.g., declaring that the Release violates the APA – would not cure any such injury. In this regard, plaintiff alleges that: “’one-third of the plans [with which] ForUsAll has discussed’ adding cryptocurrency as an investment option, ‘despite their interest in including cryptocurrency, … do not intend to proceed at this time in light of Defendants’ enforcement threats.’”
But, DOL argues, this allegation does not (explicitly, at least) connect this alleged loss of business to the Release, and DOL has the right (and duty) to enforce ERISA. Thus, even if it were forced by a court to withdraw the Release, it could still enforce its view of the statute.
DOL: the Release is just a “provisional step” in its “investigation” of the 401(k)/crypto issue
DOL’s argument with respect to the “failure to follow notice and comment requirements” claim is a little more interesting. The motion does its best to soft-pedal what DOL did in issuing the Release. Here are some interesting quotes in this vein:
The Release represents a first, provisional step in the Department’s actions concerning the offering of cryptocurrency investment options on 401(k) plans’ menu of investment options.
While the Release expresses that the “Department has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies,” … it does not determine under which conditions the duty would be breached.
There is no allegation that the Department has or will apply the Release as if it were binding on plan fiduciaries or the Department. Indeed, the Release does not resolve whether or under what circumstances offering cryptocurrency investment options represents a breach of the duty of prudence. Plan fiduciaries remain free to conduct themselves in accordance with the long-established duty of prudence, including with respect to brokerage windows, and the Release expressly contemplates that the Department would conduct plan-specific investigations to gain an understanding of the particular context before making any allegation of imprudence.
Some observations: There is a sense in which these arguments – which may provide a technical basis for dismissing ForUsAll’s claims – are a little “too cute.” No one could argue that DOL’s statement in the Release – that “plan fiduciaries … allowing [crypto] investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty” – does not sound like a threat of agency action against those sorts of arrangements. No one could argue that, at the margin, that threat has caused some sponsors to step back from setting up those sorts of arrangements. And, before this Release was offered, no one – except some at DOL who have never liked the lack of fiduciary oversight of window investments – thought the fiduciary “duties of prudence and loyalty” ever required such oversight.
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It will be interesting to see what the US District Court for the District of Columbia does with this lawsuit and whether, for instance, if it finds DOL’s standing objections persuasive, the plaintiff will be given an opportunity to cure them.
We will continue to follow this issue.