Crypto Currency in 401(k) Plans Gets a Mention from the Department of Labor

Retirement Plan CoverageCrypto Currency in 401(k) plans is still a high-risk venture.  As Crypto Currency in 401(k) retirement plans is mentioned, it seems to do so as it relates to risk.  The Department of Labor recently referenced risks associated with cryptocurrencies more than any possible return.  Bitcoin and other cryptos continue to gain popularity among investors, even through recent ‘market’ volatility.  But does crypto currency even belong in a 401(k) investors’ portfolio?  The Department of Labor (DOL) indicated recently that it has serious concerns about the use of crypto currency in 401k plans.  Assets like Bitcoin and non-fungible tokens (NFTs) (digital assets that aren’t equal to, nor can be exchanged for one another) are questionable in employer-sponsored retirement plans.

According to the DOL, 401(k) accounts containing cryptocurrencies could be subject to risks such as fraud and theft contributing to significant financial losses for participants.  Specifically, the DOL expressed concern about plan fiduciaries’ decisions to include cryptocurrencies and related products in workplace retirement plans.

Crypto currency is a relatively new asset class, particularly for employer-sponsored retirement plans.  They require a certain level of sophistication that many investors participating in 401(k) plans may lack.  In addition, crypto currency markets are extraordinarily volatile by nature.  Crypto currencies are not for novice investors or those who may react emotionally to excessive volatility or losses.  As behavioral finance tells us 401(k) plan participants are not the most rational beings.

The DOL’s reasons for its concern are:

  • Speculative and Volatile Investments
  • The Challenge for Plan Participants to Make Informed Investment Decisions
  • Custodial and Recordkeeping Concerns
  • Valuation Concerns
  • Evolving Regulatory Environment

To be sure, the DOL’s reasons are valid, as they all come with some level of risk and liability for plan participants and fiduciaries.  Although cryptocurrencies have been in existence for several years, they are still relatively uncharted territory for many investors.  The DOL’s Employee Benefits Security Administration (EBSA) is anticipated to institute a program to investigate plans that offer participants the opportunity to invest in cryptocurrencies and related investment products.

However, that alone should not be cause for alarm.  As often happens with such initiatives, the DOL may offer guidance on how fiduciaries can appropriately incorporate cryptocurrencies and related products into the plan’s investment menu.  If crypto currency is being offered in the 401(k) plans, it is likely being offered  through a self-directed brokerage account.  It may be prudent to discuss their appropriateness with your plan advisor.  Additionally, it may be a good idea to consider offering more education for participants around the risks and benefits of investing in cryptocurrencies in 401(k) plan investment strategies.  Stay tuned to 401kTV, to keep apprised of the latest developments on the DOL’s position on cryptocurrencies.

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