Cryptocurrency in Retirement Plans?

On March 10, 2022, the Department of Labor’s Employee Benefits Security Administration (EBSA) published a new release that provides plan fiduciaries guidance on cryptocurrencies in defined contribution plans.

Per the release, “The Department cautions plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.”

Under the Employee Retirement Income Security Act (ERISA), fiduciaries must act solely in the best interest of the plan and plan participants, and they must adhere to an exacting standard of professional care. As advisors, we strive to create an investment lineup that includes several different asset classes, including domestic and foreign equity; domestic and foreign fixed income; and target-date solutions. These lineups are designed to provide participants the option to invest in any combination of financial markets. However, investment options are selected based on several different quantitative and qualitative factors. Risk is one of the more important criteria we focus on as a firm.

In its short existence, cryptocurrency has proved to be extraordinarily volatile. Bitcoin in particular has shown price gains and losses up to 40% just within a month or two. Many investors don’t realize there are more than 5,000 cryptocurrencies in existence. Needless to say, it is a very confusing and overwhelming investment vehicle that everyday investors and governments alike are still trying to understand.

Crypto continues to be a speculative and volatile market. EBSA states that in this stage of its development, there are concerns over the volatility and valuation of cryptocurrencies. Financial experts claim data integrity and cash flow analysis just isn’t up to standard to properly monitor valuation.  Extreme volatility can negatively impact individual participant accounts, causing fear and concern—especially for those nearing retirement.

Crypto exists as lines of computer code, which the EBSA sites as cause for concern over recordkeepers’ ability to provide custodial services to cryptocurrencies. Another cause for concern, according to the release, is the evolving regulatory environment around cryptocurrencies. For example, selling some cryptocurrencies could constitute an unlawful sale of securities in unregistered transactions. Plan fiduciaries must always take care to avoid participating in unlawful transactions.

President Biden’s March 9, 2022 investigatory Executive Order made many crypto investors optimistic about the future of cryptocurrency. Many believe the sooner the government establishes rules and guidelines, the faster cryptocurrencies will become mainstream tools of the trade. For the time being, this release indicates the EBSA seems to be in line with the majority of retirement plan advisors and their sentiment towards cryptocurrencies and their availability in defined contribution plans.

It is becoming clear that cryptocurrencies will play a role in the future of investing. If you paid attention to the commercials during the latest Super Bowl, you probably understood that. Whether you were chasing the floating QR code or watching Matt Damon tell us “fortune favors the bold”, it became clear that crypto is certainly among us. But as plan fiduciaries, we are responsible for providing plan participants with well-vetted, risk-adjusted options that set them up for a smoother ride towards retirement. The DOL’s current stance on cryptocurrency’s role within defined contribution plans comes as no surprise to those of us who conduct a prudent process for all our clients.

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