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Where Things Stand with Cryptocurrency in 401(k) Plans

Industry Trends and Research

The Congressional Research Service has issued a concise synopsis of the current policy developments surrounding the inclusion of cryptocurrency in DC plans.  

The CRS, which serves as nonpartisan research staff to congressional committees and members of Congress, explains that in recent months policymakers have paid increasing attention to the prospect of DC plan participants being able to invest in cryptocurrency. “While some contend that cryptocurrency in retirement accounts could benefit participants, others have expressed concern about its appropriateness as an investment option,” the researchers observe in Cryptocurrency in 401(k) Retirement Plans, published July 1. 

Until recently, cryptocurrency was not available as an investment option for DC plan participants. That changed in 2021, however, when FORUSALL announced that it would be the first financial services company to offer plan sponsors the option to adopt cryptocurrency as an investment for participants through its brokerage window. Then in April 2022, Fidelity announced its intention to allow 401(k) participants whose plan sponsors adopt it as an investment option to invest up to 20% of their account balances in Bitcoin.  

Prior to Fidelity’s announcement, the DOL in March 2022 released a Compliance Assistance Release in which it expressed “serious concerns” about plan fiduciaries’ decisions to allow DC plan participants to invest in cryptocurrencies. The release also indicated that DOL planned to conduct an investigative program aimed at plans that offer such investments and that plan fiduciaries could expect to be questioned by DOL about their decisions, but a DOL official subsequently noted that plans that allow cryptocurrency will not be automatically subjected to an audit, CRS notes. 

Meanwhile, in response to the DOL’s release, 11 trade associations wrote to DOL in April, requesting that it be withdrawn and that guidance be developed via the rulemaking process. In addition, FORUSALL filed suit in June seeking to vacate the release on the grounds that the guidance violated the Administrative Procedure Act.

The CRS brief notes that members of Congress have addressed the issue as well, introducting legislation and seeking in-depth examinations of the issue. For instance, the Financial Freedom Act introduced by Sen. Tommy Tuberville (R-AL) (S. 4147) and by Rep. Byron Donalds (H.R. 7860)) would, among other things, prohibit regulations that would constrain or prohibit the type of investments that could be offered through a brokerage window in a DC plan. Other members, including House Ways and Means Committee Chairman Rep. Richard Neal (D-MA), have asked the Government Accountability Office (GAO) to examine the use of cryptocurrency and digital assets in retirement plans—which could help form the basis for future legislation. 

Brokerage Window Issues?

The CRS brief suggests that plan sponsors’ fiduciary responsibilities regarding digital currency in retirement plans may depend on the channel through which the investment choice is offered to participants. For example, while Fidelity is offering plan sponsors the choice to include digital asset investments as part of their investment menus, FORUSALL is offering digital asset investments through its brokerage window.

As a result of the possibility of 401(k) plan participants’ investments in cryptocurrency, broader policy issues surrounding brokerage windows have resurfaced. “While plan sponsors might have a duty to monitor the brokerage window provider, plan sponsors do not have a duty to monitor participants’ investments purchased through a brokerage window,” the brief observes. It adds that this could lead to participants paying high fees for investments chosen through a brokerage window.

Moreover, brokerage windows can allow sophisticated investors to construct investment portfolios more appropriate to their individual circumstances than they could by using a plan’s designated investment alternatives. However, participants with less sophisticated investment knowledge could make investments that would be inappropriate for their circumstances, CRS observes.