PLANSPONSOR - April - May 2022 - 39

INSIDE ANGLE
Opposition
To Digital Assets
The DOL casts a shadow on cryptocurrencies in DC plans
O
n March 9, President Joe Biden issued the highly
anticipated executive order Ensuring Responsible
Development of Digital Assets. The order was in
response to the significant proliferation of digital assets, including
non-fungible tokens and cryptocurrencies such as bitcoin,
which the Biden administration noted " necessitate an evolution
and alignment " of the U.S.'s approach to these assets.
One day after the executive order, the Department of Labor's
Employee Benefits Security Administration issued Compliance
Assistance Release No. 2022-01, 401(k) Plan Investments in
Cryptocurrencies. Unlike the executive order, the release sends a
clear and specific signal that the DOL largely opposes retirement
benefit plans' investment in digital assets.
The release also includes an explicit threat that fiduciaries
who make digital assets available to participants through their
retirement plan, either as a stand-alone investment or a brokerage
window, will be investigated. The release is important, as the DOL
has not historically issued guidance about the appropriateness of
any investment option within a retirement plan. Additionally, we
are unaware of any statute or regulation that would permit such
action under the Employee Retirement Income Security Act. The
implications for plan fiduciaries are described below.
The Release
DOL officials have publicly expressed reservations about digital
assets in qualified retirement plans over the past year and have
specifically detailed the department's concerns regarding volatility
and a lack of transparency. The release expresses " serious
concerns " with the investment of plan funds in digital assets and
warns that fiduciaries exercise " extreme care " before they add
digital asset options to a 401(k) plan's investment menu.
The release then summarizes a number of concerns that
may be relevant to a plan fiduciary's decision to include digital
assets. Those concerns include that, in the DOL's eyes, cryptocurrencies
include risks with respect to the following:
* Volatility and speculativeness - The DOL cautions that digital
assets have been subject to extreme price volatility, which can
have a " devastating " impact on retirement savings.
* Challenges in making informed Investment decisions - The
DOL cautions that participants have difficulty discerning risks
associated with their investments.
* Custodial and recordkeeping issues - The DOL argues that
digital assets are not held like traditional assets are in trust or
custodial accounts, which can raise the likelihood of theft or loss.
* Unreliable valuation - The DOL expresses concerns regarding
the reliability and accuracy of digital asset valuations and noted
that none of the proposed models for valuing digital assets are as
sound or defensible as " traditional cash flow models " for equities
or credit models for debt.
* Evolving regulatory environment - The agency also cautioned
that future regulatory changes could expose plan fiduciaries to
liability for potentially violating the securities laws.
The release takes the unprecedented step of threatening to
investigate fiduciaries that make digital assets available. This is
meaningful as fiduciaries often expend considerable resources
over the course of DOL investigations.
Additionally, the release also appears to shift the DOL's
position with respect to the fiduciary implications of offering
brokerage windows. The department seems to indicate that fiduciaries
may have an obligation to prudently select and monitor
digital assets offered through a bona fide brokerage window.
This is a significant deviation from current guidance.
Service providers that offer opportunities to invest in digital
assets, and sponsors that then utilize these, should take heed of the
DOL's strongly worded release. However, it did not go through the
notice-and-comment process as required by the Administrative
Procedures Act and therefore theoretically lacks the force and
effect of law.
The DOL has arguably used the release to circumvent
the notice-and-comment process by attempting to create new
substantive requirements for fiduciaries and functionally
banning a particular asset class. Notably, the release seeks to
modify the law retroactively-particularly as to a fiduciary's
review of brokerage windows-and reflects that a past failure to
monitor could expose the fiduciary to liability.
As noted in our February/March column, " The Next Chapter, "
the department is currently in litigation over a similar use of subregulatory
guidance to take novel legal positions. It remains to be
seen how the release ages with the ongoing proliferation of digital
assets and potential for their broader regulation and acceptance.
Steve Saxon is a partner in Groom Law Group, Chartered, and
George Sepsakos is a principal in Groom. Offices for Groom
are in Washington, D.C.
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