Cryptocurrency Investments and 401(K) Plans

Many of us of a certain age, especially those not covered by governmental or other defined benefit pension plans, are particularly interested in our 401(k) plan accounts, an important pillar of retirement savings and overall wealth.  And indeed, because of the importance of these accounts, a considerable debate has arisen as to what investments are suitable for investment by 401(k) plans participants, who generally have control over their accounts.  In particular, there is much discussion over whether crypto currency (and related investments like crypto coins and tokens) are appropriate 401(k) assets.

Many 401(k) plans are pretty conservative in their investment options, basically providing an investment menu of selected mutual funds.  However, quite a few also permit greater investment flexibility by permitting participants to open brokerage window accounts that allow investment in many other available options.

Rightly or wrongly, the Department of Labor (DOL), which has regulatory authority over fiduciary duty rules for qualified retirement plans including 401(k) plans, issued a very cautionary statement earlier this month, on permitting investments by participant in crypto assets  The DOL, while not completely banning such investment options, said that plan sponsors who allow such investments will be subjected to an investigatory program and actions to protect plan participants.  These sponsors should expect to be questioned about “how they can square their actions with the duty of prudence and loyalty to participants”.

In reaching its conclusion that cryptocurrencies and similar investments are undesirable for plans, the DOL said that employers sponsoring 401(k) plans have an obligation to insure the prudence of investment options on an ongoing basis..

In addition, the DOL cited a number of specific objections to crypto investments.  First, it called the investments speculative and volatile, citing extreme price volatility, which may be due to the many uncertainties associated with valuing the assets.  Second, it pointed to the difficulty of enabling informed decisions by plan participants “with great expectations of high returns and little appreciation of the risks the investments pose to their retirement investments”.  Third, the DOL noted custodial concerns since cryptocurrency assets generally exist as computer code in a digital wallet rather than being held in custodial or trust accounts.  Fourth, the DOL raised valuation issues, including disagreements on valuation models and lack of consistent accounting treatment.  Fifth, the DOL pointed to an unstable regulatory environment for cryptocurrency investments, which poses risk of noncompliance by holders.

This is a difficult issue, but the position of the DOL may be a little too constricting. In truth, crypto investments have become significantly more mainstream in recent years. In a recent survey of financial advisers described in The New York Times, 16 percent had allocated crypto investments to their clients’ portfolios in 2021.  In addition, BlackRock and Charles Schwab recently filed to register funds that track the crypto economy. Also worth mentioning, by allowing brokerage windows, the DOL already condones many risky or speculative plan investments.

At my age, I personally would not be interested in investing my 401(k) assets in crypto, and I share some of the doubts expressed by the DOL about this type of investment.  On the other hand, the situation may be different for others.  For example, a younger participant many years from retirement might reasonably conclude that the possibility of sharp appreciation in crypto investments is worth the risks of loss since he or she has many years to recoup any potential declines.

Maybe there are some better solutions besides clamping down on plans allowing cryptocurrency investments by threatening investigations.  For example, until we understand these investments better, perhaps the Department could exempt from sanctions plan sponsors that restrict cryptocurrency investors to, say, 10 percent of account balances or who adopt some kind of sliding scale where a higher percentage limit is in effect for younger participants.  On balance, effectively blocking off emerging forms of investments that could produce significantly better returns may not be in the long term best interest of every plan participant.

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