US Labor Dept warns of crypto risks in retirement plans

Published at: March 11, 2022

The US Department of Labor (DOL) has told 401(k) investors to "exercise extreme care" when dealing with cryptocurrencies and other digital assets citing fraud, theft, and financial loss as “significant risks”.

In a compliance report, released on Thursday, the DOL offered a stark warning to employers that seek to increase their 401(k) exposure to cryptocurrencies, stating that any significant crypto investments within company-sponsored retirement accounts may attract legal attention.

A 401(k) is a retirement savings plan offered by most American employers that extend tax advantages and long-term financial security to those that opt-in.

Regarding the legislation surrounding 401(k) investments, the Employee Retirement Income Security Act of 1974 (ERISA) does not specifically detail which asset classes must be included in a 401(k). However, it does instruct fiduciaries to “show the care, skill, prudence, and diligence that a prudent person would exercise” when making investment choices “in order to minimize the risk of large losses.”

ERISA also extends a legal obligation to fiduciaries to monitor all investments on an ongoing basis in order to further mitigate any losses. This means that extremely volatile assets such as cryptocurrencies may yet prove to be increasingly ambiguous in regards to 401(k) investments.

The recent DOL announcement comes as an increasing number of financial services begin to market crypto as an investment choice for 401(k) fixed retirement accounts, including ForUsAll Inc. which announced a strategic partnership with Coinbase in June last year.

In a DOL blog post that accompanied the compliance report, Employee Benefits Security Administration (EBSA) Assistant Secretary, Ali Khawar, proffered caution to fiduciaries, stating, “The retirement savings of America’s workers and their families represent years of hard work and sacrifice… and [they] must be carefully protected.”

Khawar continued to say that the DOL had significant concerns for long-term investments in any form of digital asset:

"At this early stage in the history of cryptocurrencies, however, the [DOL] has serious concerns about plans' decisions to expose participants to direct investments in cryptocurrencies or related products, such as NFTs, coins and crypto assets"

While President Joe Biden’s recent executive order on cryptocurrencies highlighted the risks associated with investments in digital assets, actual regulatory clarity on cryptocurrencies and other digital assets has yet to be formulated, exacerbating confusion about what investors can and can’t do with their digital assets.