PLANADVISER -May/June 2022 - 39

ERISA vista
Fred Reish and Joan Neri
Cryptocurrency in DC Plans
The DOL explains the digital investment products' risks and challenges
QUESTION: I'm a registered investment adviser who
advises 401(k) plan committees about
the investment
options to be offered in their plan lineup. Some committee
members are asking whether funds that invest in
cryptocurrencies should be included among the offerings.
Does the Employee Retirement Income Security Act permit
401(k) plans to offer such investment options?
ANSWER: ERISA does not explicitly limit the kinds of
investments that may be offered for participant direction.
However, plan fiduciaries, such as committee members,
must satisfy the act's duties of prudence and loyalty. In
recent guidance, the Department of Labor has indicated
that it has concerns about the prudence of offering
cryptocurrency funds in 401(k) plans.
Under ERISA, the committee must act prudently in
selecting investment options to be offered on the plan
lineup. In Compliance Assistance Release 2022-01, the DOL
explains its view of the prudence standard in the context
of selecting investments in cryptocurrencies or in investment
products whose values are tied to cryptocurrencies.
Incidentally, a CAR does not constitute a law or a regulation.
Instead, it is an expression of the DOL's opinion.
In the CAR, the DOL says its view is that plan fiduciaries
should exercise " extreme care " in selecting such investments;
it observes that fiduciaries need to understand and
evaluate the risks associated with cryptocurrency-related
investments and should have the experience or expertise to
evaluate those investment strategies, or should work with
advisers who do.
In the CAR, the DOL lists and explains a number of risks
and challenges that such investment products present,
including the following:
Difficulty understanding and evaluating the cryptocurrency
investment. Evaluating and understanding these
nontraditional investments without the requisite technical
knowledge is challenging for most plan participants-even
for expert investors. This means participants may be less
able to make informed decisions about those investments.
Valuation issues. There is disagreement among experts
about the appropriate valuation methodology for cryptocurrencies.
This challenge is compounded by the fact that
cryptocurrency market intermediaries may not adopt the
same accounting, reporting and data integrity requirements
with respect to pricing. As a result, the DOL indicated,
it has concerns about the reliability and accuracy of
cryptocurrency valuations.
Custodial and recordkeeping challenges. Cryptocurrencies
are not held in a trust or custodial account, but instead
generally exist as lines of computer code in a digital wallet;
this may expose plans holding such investments to loss,
hackers or theft.
Volatility. Cryptocurrencies have been subject to
extreme price volatility which could have a significant
impact on participant accounts, especially for those participants
who are close to retirement.
Evolving regulatory framework. The evolving regulatory
landscape regarding cryptocurrencies requires that fiduciaries
consider the potential application of a wide range of regulatory
requirements-e.g., those that apply to investments,
issuance of such investments, trading and other activities.
In concluding, the DOL indicated that it would be
conducting an investigative program aimed at plans that
offer investment options in cryptocurrency and related
products and take " appropriate action " to protect plan
participants' interests. In a surprising statement, the agency
added that plan fiduciaries that allow 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 " it has described.
This statement about brokerage windows is inconsistent
with earlier DOL guidance, from 2012. In that guidance,
which was issued in connection with the 404a-5 participant
disclosure rules, the DOL stated that investments in
brokerage windows are not designated investment alternatives.
The agency explained that, while there's a fiduciary
duty to evaluate the provider of the brokerage window by
taking into account the nature and quality of the services
supplied in connection with the window, there is no fiduciary
duty to monitor or evaluate the underlying investments as
would be the case with designated investment alternatives.
Certainly, to monitor, track and prevent investment in
cryptocurrencies and related products through a brokerage
window would be burdensome and present significant challenges
for plan fiduciaries. As stated above, the CAR is not
a law but merely the DOL's view. Hopefully, the agency will
issue further guidance on this issue.
Fred Reish is chairman of the financial services ERISA practice
at law firm Faegre Drinker Biddle & Reath LLP. Joan Neri, a
nationally recognized expert in employee benefits law, is
counsel in the firm's financial services ERISA practice.
Art by Tim Bower May-June 2022 | 39

PLANADVISER -May/June 2022

Table of Contents for the Digital Edition of PLANADVISER -May/June 2022

PLANADVISER Industry Leaders Awards
Paving the Way
2022 DCIO Survey
Fool's Gold for 401(k)s?
Design and Stability
A Collective Effort
Cryptocurrency In DC Plans
Real Estate Fund Investments
PLANADVISER -May/June 2022 - Cover1
PLANADVISER -May/June 2022 - Cover2
PLANADVISER -May/June 2022 - 1
PLANADVISER -May/June 2022 - 2
PLANADVISER -May/June 2022 - 3
PLANADVISER -May/June 2022 - 4
PLANADVISER -May/June 2022 - 5
PLANADVISER -May/June 2022 - 6
PLANADVISER -May/June 2022 - 7
PLANADVISER -May/June 2022 - 8
PLANADVISER -May/June 2022 - 9
PLANADVISER -May/June 2022 - PLANADVISER Industry Leaders Awards
PLANADVISER -May/June 2022 - 11
PLANADVISER -May/June 2022 - 12
PLANADVISER -May/June 2022 - 13
PLANADVISER -May/June 2022 - 14
PLANADVISER -May/June 2022 - 15
PLANADVISER -May/June 2022 - 16
PLANADVISER -May/June 2022 - 17
PLANADVISER -May/June 2022 - 18
PLANADVISER -May/June 2022 - 19
PLANADVISER -May/June 2022 - Paving the Way
PLANADVISER -May/June 2022 - 21
PLANADVISER -May/June 2022 - 22
PLANADVISER -May/June 2022 - 23
PLANADVISER -May/June 2022 - 2022 DCIO Survey
PLANADVISER -May/June 2022 - 25
PLANADVISER -May/June 2022 - 26
PLANADVISER -May/June 2022 - 27
PLANADVISER -May/June 2022 - 28
PLANADVISER -May/June 2022 - 29
PLANADVISER -May/June 2022 - Fool's Gold for 401(k)s?
PLANADVISER -May/June 2022 - 31
PLANADVISER -May/June 2022 - 32
PLANADVISER -May/June 2022 - 33
PLANADVISER -May/June 2022 - Design and Stability
PLANADVISER -May/June 2022 - 35
PLANADVISER -May/June 2022 - A Collective Effort
PLANADVISER -May/June 2022 - 37
PLANADVISER -May/June 2022 - 38
PLANADVISER -May/June 2022 - Cryptocurrency In DC Plans
PLANADVISER -May/June 2022 - Real Estate Fund Investments
PLANADVISER -May/June 2022 - Cover3
PLANADVISER -May/June 2022 - Cover4