Mailbag: Should we make cryptocurrency a 401(k) option?

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In HR Dive’s Mailbag series, we answer HR professionals’ questions about all things work. Have a question? Send it to [email protected].

Q: Should we add cryptocurrency investment options to our 401(k) menu?

A: There’s no simple answer to this question, according to Fisher Phillips Partner Phillip C. Bauknight, who chairs the firm’s cryptocurrency and blockchain practice group. Instead, the question requires individual employers to weigh the risks of cryptocurrency investment options against the potential rewards.

The first and most obvious consideration for employers to mull is the regulatory landscape found at the intersection of cryptocurrency and 401(k) offerings. In March, the U.S. Department of Labor’s Employee Benefit Security Administration issued guidance warning 401(k) plan fiduciaries to “exercise extreme care” before adding a cryptocurrency option to their plan’s investment menu. EBSA’s guidance questioned the “prudence” of a fiduciary’s decision to expose plan participants to the risks associated with cryptocurrency and reminded fiduciaries of their duty under the Employee Retirement Income Security Act to “act solely in the financial interests of plan participants and adhere to an exacting standard of professional care.”

The administration’s position must factor heavily into an employer’s decision regarding cryptocurrency and retirement investment, Bauknight told HR Dive in an interview. “When you’re evaluating your risk tolerance, you have to decide your appetite – are you going to go full throttle and pursue this regardless of the current suggestions or do you want to wait?”

Bauknight emphasized a particular section of the guidance: EBSA’s plans for an “investigative program” designed both to scrutinize plans offering cryptocurrency investments and to spur action protecting participants and beneficiaries. Fiduciaries overseeing or allowing crypto investment options “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,” EBSA wrote.

Most employers don’t understand what an investigation from the EBSA entails, Bauknight noted. The agency can initiate an investigation over complaints, media reports and enforcement initiatives. The fiduciary will learn of the investigation when it receives a subpoena for documents or when the EBSA itself makes a site visit to conduct interviews.

“An employer who wants to go this route would have to understand that this is what an investigation entails,” Bauknight said, emphasizing the importance taking the necessary steps to satisfy the standard of care.

Of course, DOL’s warning has received pushback. A retirement plan provider sued DOL June 2, alleging its warning was “arbitrary and capricious” and exceeded the bounds of its authority under ERISA. The agency violated federal law by issuing its position through guidance, rather than advancing it through the formal rulemaking process, the plaintiff said.

The complaint noted the strong demand to add cryptocurrency investment options to retirement plans — a demand that shrunk significantly when DOL released its guidance in March. Though the majority of plans remain interested in adding cryptocurrency options, about a third will no longer pursue the options because of DOL’s “enforcement threats,” the complaint said.

The claims against DOL come as part of the process to achieve regulatory clarity, Bauknight said. Consumers and regulators must find a balance that satisfies those who want cryptocurrency options and those who want to protect participants from the associated risks. 

As this process plays out, employers will have to weigh the factors as they evaluate the benefits, which are numerous and significant, Bauknight pointed out. 

Workers have voiced demand for crypto products increasingly. The pandemic drove some of this demand, Bauknight suggested. “The pandemic really changed things for everyone and forced everyone to revaluate their priorities,” he said. “The ability to have offerings [of] cryptocurrency products provide the employee more control over when, how and in what form they receive payment for their services.”

Satisfying this demand may lend employers an advantage as they compete for talent, especially in industries that value innovation. Offering cryptocurrency options in 401(k) plans could “provide an incentive to certain categories of applicants and workers,” Bauknight said.

Crypto options and employer responsibilities

The regulatory battles and broader discussions developing around cryptocurrency and 401(k) options may spur employers to review some of the basics of employee benefits. While the fundamentals refresh employers on their responsibilities, they also offer employers a few tips on how to proceed the most soundly when adding cryptocurrency options to their menu.

When it comes to 401(k)s, plan sponsors are the ones who hold in trust the assets, Bauknight said. According to ERISA, individuals making decisions about the plans are the fiduciaries. And the fiduciaries, as ERISA stated in its guidance, must act exclusively in the best interest of the plan participants. That means employer plan sponsors and fiduciaries are duty-bound by law to monitor plan investments and remove any options that are imprudent, Bauknight said.

It’s important to note that ERISA does not dictate to fiduciaries the decisions they should make. Rather, it compels them to minimize the risk for large losses.

“That’s where crypto comes in – there’s a concern about protecting individuals from large losses,” Bauknight said. 

One of the most common reasons participants sue their employers in the area of benefits is over inappropriate investment choices, he noted. Cryptocurrencies have a history of sharp increases and sharp declines. It’s not a typical investment vehicle, and its inclusion on the 401(k) menu may cause employers to deviate from its investment policy statement — what most employers use to guide investments. Deviation from the IPS could serve as evidence that an employer has breached its duties, Bauknight said.

Together or alone, this could create risk for a breach of duty claim, Bauknight said. Still, ERISA doesn’t prohibit cryptocurrencies as an investment option in 401(k) plans, and the option could draw talent and boost retention. 

Bauknight offered several suggestions to employers opting to add cryptocurrencies to their suite of 401(k) investment options:

  1. Confirm with the provider that cryptocurrency is an option.
  2. Evaluate the IPS to ensure there are no provisions prohibiting cryptocurrencies.
  3. Ensure fiduciaries follow all steps in the IPS in selection.
  4. Consider some type of limit on the amount someone can put toward crypto investments.
  5. Keep participation optional.
  6. Ensure employees receive educational materials about new investment options.