PLANSPONSOR - June - July 2022 - 38

FIDUCIARY FORUM
Caution Needed
Cryptocurrency concerns cause committee consternation
S
o you've set up your 401(k) plan to take advantage of
Employee Retirement Income Security Act Section
404(c)-participants, not the plan committee, are responsible
for their investment elections. This means, as long as the
committee provides a diversified list of options from which to
choose and satisfies the 404(c) disclosure obligations, it has no
fiduciary responsibility for the participants' elections, right? Not
so fast. The committee is still responsible
for prudently selecting and monitoring the
options made available to the participants.
The Department of Labor has long
taken the position that retirement plan fiduciaries
responsible for selecting and monitoring
investment options offered under
a 401(k) plan are not required or expected
to always pick winners. Other than going
back to the past like Marty McFly or using
a hot-tub time machine to pick the bestperforming
investments, plan committee
members have no way to see what lies
ahead and always make the best choices.
Instead, the DOL requires that fiduciaries go
through a prudent process, one considering
all of the relevant facts and circumstances,
in selecting and monitoring investment options. Remember, it's
not just the initial selection that requires a prudent process but
also the ongoing responsibility to monitor the investments to
determine whether they continue to be appropriate.
This means at least that, as long as the plan committee
has received the committee's stamp of approval.
Thus, based on the Compliance Assistance Release,
What may
present more
of an issue
is the DOL's
reference to
self-directed
brokerage
windows ...
while the plan committee isn't required to always pick highperforming
investment options and may have gone through a
prudent process in selecting one, the DOL believes the inherent
risks associated with cryptocurrencies would justify an inquiry
into the committee's decision. The DOL stated that fiduciaries
including a cryptocurrency option on the
fund menu " should expect to be questioned
about how they can square their actions
with their duties of prudence and loyalty. "
The DOL also noted the same when such
investments
are
brokerage windows.
Given the
permitted
agency's
through
concerns
with
respect to 401(k) plans adding a cryptocurrency
option to their lineup, plan committees
should think carefully before they do
that. This will likely not be that difficult-
simply don't offer them.
While it's possible that participants
will ask the plan sponsor to include cryptocurrency
options, there is no requirement
to offer every type of investment that
participants request, and committees can point to this guidance
as an explanation.
What may present more of an issue is the DOL's reference to
goes through a prudent process in selecting an investment
option, the members have satisfied their fiduciary duty, right?
Again, not so fast. The DOL recently issued guidance-viz.,
Compliance Assistance Release No. 2022-01-cautioning plan
fiduciaries to " exercise extreme care " before adding a cryptocurrency
investment option to the plan's investment menu. The
agency discussed significant risks associated with cryptocurrencies,
including that they are highly speculative, raise custodial
and recordkeeping issues, have questionable valuation and are
subject to regulatory concerns.
The DOL also noted that participants may be unqualified
to evaluate the risks associated with cryptocurrencies and may
believe that, if the plan investment menu now includes one, this
38
PLANSPONSOR.COM June - July 2022
Art by Joseph Ciardiello
self-directed brokerage windows, as this raises questions about
what responsibilities a committee has in connection with such
options. Investments through self-directed brokerage windows
have generally been viewed as outside the committee's fiduciary
duties. But the DOL's reference to cryptocurrencies, if offered
through self-directed options, triggering its inquiry suggests
otherwise. Absent further guidance or clarification on this front,
plan committees may want to take some steps to prohibit or limit
the ability to purchase a cryptocurrency within any self-directed
brokerage window.
Summer Conley is a partner in the Los Angeles office of
Faegre Drinker Biddle & Reath LLP. Michael Rosenbaum is
a partner in the firm's Chicago office.
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