Crypto 401k Compliance Alert! DOL Cautions Employers to use “Extreme Care” Before Adding Crypto 401k Investment Option

As anticipated since last year (and in the wake of the Biden Administration’s executive order on cryptocurrency), the Department of Labor (DOL) issued formal guidance (Compliance Assistance Release No. 2022-01) calling on employers to exercise “extreme care” before offering employees the option to invest their 401k funds in cryptocurrency.

The DOL guidance first reminds employers that in selecting 401k investment options for its employees, employers “must act solely in the financial interests of plan participants and adhere to an exacting standard of professional care” and “[f]iduciaries who breach those duties are personally liable for any losses to the plan resulting from that breach.”

The guidance goes on to state that:

  • “When defined contribution plans offer a menu of investment options to plan participants, the responsible fiduciaries have an obligation to ensure the prudence of the options on an ongoing basis.”
  • “At this early stage in the history of cryptocurrencies, 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. These investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss,” citing the following specific reasons:
    • Speculative and Volatile Investments – States that an investment in cryptocurrency is “highly speculative” and “subject to extreme price volatility”
    • The Challenge for Plan Participants to Make Informed Investment Decisions – Notes that while promoted as “innovative” investments that “offer investors unique potential for outsized profits” cryptocurrencies are “very different from typical retirement plan investments, and it can be extraordinarily difficult, even for expert investors, to evaluate these assets and separate the facts from the hype” and goes on to note that “When plan fiduciaries, charged with the duties of prudence and loyalty, choose to include a cryptocurrency option on a 401(k) plan’s menu, they effectively tell the plan’s participants that knowledgeable investment experts have approved the cryptocurrency option as a prudent option for plan participants.”
    • Custodial and Recordkeeping Concerns – Notes that cryptocurrencies are “not held like traditional plan assets” but “[i]nstead, they generally exist as lines of computer code in a digital wallet” and “simply losing or forgetting a password can result in the loss of the asset forever” as well as noting that “[o]ther methods of holding cryptocurrencies can be vulnerable to hackers and theft.” 
    • Evolving Regulatory Environment – Notes that with evolving rules and regulations “some market participants may be operating outside of existing regulatory frameworks or not complying with them” and furthermore notes that “[p]lan fiduciaries must take care to avoid participating in unlawful transactions, exposing themselves to liability and plan participants to the risks of inadequate disclosures and the loss of investor protections that are guaranteed under the securities laws.’

The DOL release is certainly very important guidance for an employer with a traditional 401k that may be considering including cryptocurrency as an investment option in a 401k plan for the employees who participate in the plan.

For an owner-only business (i.e. self-employed person with no non-owner employees) that maintains a self-directed Solo 401k, the business owner may invest his or her own funds in real estate, cryptocurrency, notes, and other allowable investments.

Continue the discussion in our My Community where our Owners host a daily LIVE webinar where you can ask questions and you can post questions in our forums: Cryptocurrency Forum

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About George Blower

I have the privilege of educating our clients about our products and services so that they can make informed and confident decisions about their financial future. Prior to joining My Solo 401k Financial, I served as the general counsel for a subsidiary of a Fortune 500 financial services company. Learn more about George Blower and My Solo 401k Financial >>

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