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Cryptocurrency and Retirement Plans

Practice Management

As advisors, TPAs, recordkeepers and other service providers are dipping their toes into including cryptocurrency solutions to their clients, the regulators and legislators are wading in as well. It has been an active first half of 2022 in the world of crypto offerings with general interest in regulating cryptocurrencies and digital assets coming from President Biden and specific interest about cryptocurrencies in retirement plans from Congress and the Department of Labor’s Employee Benefits Security Administration (EBSA).

Evolving Legal Landscape

Cryptocurrencies are digital currencies that rely upon decentralized “blockchains” (in simplified English, computer code) to verify and record transactions. There is a heated debate over whether these cryptocurrencies are securities, commodities or a something else altogether—making the regulation of cryptocurrency a contentious topic for some. Securities, broker-dealers, and registered investment advisers are subject to oversight by the federal Securities and Exchange Commission or, in some cases, state equivalents. Commodities are generally overseen by the Commodity Futures Trading Commission. Retirement plans are subject to the oversight of EBSA and the Internal Revenue Service. Some states also license money transmitters and cryptocurrency related activities, such as New York with its BitLicense.

With so many interested parties, not a day seems to pass without new statements from these regulators. In the retirement space, the statement that is most top of mind is EBSA’s controversial Compliance Assistance Release (CAR) 2022-01, “401(k) Plan Investments in Cryptocurrencies.”

Self directed brokerage windows have long been used to allow retirement plan participants to invest their retirement plans in investments that are not part of a plan’s core investment lineup, which under ERISA is generally comprised of “designated investment alternatives.” Importantly, while plan fiduciaries have a role in examining and monitoring the brokerage window offering, they historically have not been required to determine the prudence of each (or any specific) investment offering nor monitor the performance of each investment offering in the brokerage window. With this background, we turn to CAR 2022-01.


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Compliance Assistance Release 2022-01

The CAR lists a number of items that the DOL suggests may be relevant to a plan fiduciary’s decision to include cryptocurrencies, including issues related to volatility, administration, valuation, and the regulatory environment and concludes with a statement that EBSA has “serious concerns” about the investment of plan assents in cryptocurrency. In fact, EBSA threatens to open an investigation of plans that offer cryptocurrencies:

[EBSA] 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. 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.”

Undergoing an EBSA investigation can be incredibly disruptive for plan fiduciaries and staff. They can be very time consuming and expensive. Creating controversy is that the fact that never has a particular investment been an automatic volunteering for an EBSA investigation, especially not one with prejudged outcomes.

Importantly, CAR 2022-01 can be read to be the first time an additional duty of prudence has been imposed on a single asset type within a brokerage window. Such an approach would be a significant break from prior practice and guidance, especially given that the Release is not a formal regulation issued by EBSA.

This departure has resulted in pushback from many sources, including letters from Sen. Tommy Tuberville (R-AL) to EBSA questioning this move. Tuberville also introduced legislation that would prohibit EBSA from restricting what a plan participant can invest in through a brokerage window. Other senators have gone in the opposite direction, with different views on accessing cryptocurrency through a retirement plan.

Recently, a lawsuit was filed against the Department of Labor by ForUsAll, Inc., a cryptocurrency service provider, asserting that CAR 2022-01 violates the Federal Administrative Procedure Act, the law that sets out rules agencies issuing guidance must follow, and seeking to vacate and set aside CAR 2022-01 and limit EBSA’s actions in furtherance of the Release.1

Wallets and Other Infrastructure

The infrastructure required to support direct investment in cryptocurrency can take a while to build and test. Using a personal wallet to directly hold cryptocurrency may be a plan participant’s preference, but it seems more likely that an institutional wallet will be in play for retirement plans. Teaming with a crypto native may be the most cost effective entry, but would necessitate the transfer of funds and data between a recordkeeper, TPA and another third party. Recordkeepers and TPAs, like any other business entity, will want to perform due diligence on any entity they use for such services, looking at items surrounding cybersecurity, business continuity, insurance and more—and should expect similar diligence from other crypto partners.

Allison Itami and David N. Levine are principals with the Groom Law Group, Chartered, in Washington, DC. This column appears in the latest issue of NAPA Net the Magazine.

 

  1. ForUsAll, Inc. v. United States Department of Labor, filed June 2, 2022 in U.S. District Court for the District of Columbia. Note: Groom Law Group, Chartered represents the plaintiffs in this complaint. 

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