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Department of Labor Position on Cryptocurrency Investment in 401(k) Plans

Practical and Legal Considerations


By: Sheldon M. Geller, JD, CPA


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Many 401(k) plan sponsors mistakenly believe that they have no liability for investment fund options made available to participants in core investment menus and self-directed brokerage accounts. Also, many plan fiduciaries mistakenly believe that they have delegated investment fund selection and ongoing performance monitoring responsibility to their investment advisor. But in reality, regulatory investigations and participant lawsuits are brought upon and against employers and plan fiduciaries for, among other reasons, imprudent investment options; courts and regulators have routinely held plan sponsors liable to restore participant accounts [see 401(k) Lawsuits: The Causes and Consequences, The Center for Retirement Research at Boston College, May 2018].

Participants ignore debatable practices when markets increase and routinely review fund performance when markets decrease. But class action lawyers rarely ignore debatable 401(k) plan practices.

Department of Labor (DOL) investigations and Employee Retirement Income Security Act (ERISA) litigation require plan fiduciaries to demonstrate that they have conducted due diligence and consistently applied investment policy when selecting and retaining investment fund alternatives under their participant-directed investment menus and brokerage accounts.

Plan fiduciaries need to ask appropriate questions, conduct due diligence, monitor fund performance, review peer group analysis, and take action necessary to protect plan participants to satisfy their duties of prudence and loyalty. Regulatory investigations and class action lawsuits create reputational risk, monetary damages, and operational sanctions.

The DOL recently issued a release strongly cautioning plan fiduciaries to exercise extreme care before adding a cryptocurrency option to their 401(k) plan investment menus (see Compliance Assistance Release 2022-01, 401(k) Plan Investments in “Cryptocurrencies,” U.S. Department of Labor, Employee Benefits Security Administration, March 10, 2022). The DOL intends to investigate plans that offer participant-directed investments in cryptocurrencies, question plan fiduciaries as to their fund selection process, and take action to protect participants.

Plan fiduciaries who are found to have breached their prudence obligation will be personally liable for any losses resulting from that breach, based upon the following principles:

  • Responsible plan fiduciaries have an obligation to ensure that investment options made available to participants are prudent upon selection and on an ongoing basis.
  • Fiduciaries may not transfer responsibility to participants to identify and avoid imprudent investments available in an investment menu or brokerage account.
  • Fiduciaries must evaluate investment options made available to participants and ensure that these investment options are, and remain, prudent.
  • Fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in their plan’s investment menu of options, even though participants direct the investment of their plan accounts [see Hughes v. Northwestern University, 142 S. Ct. 737, 742 (2022)]. Fiduciaries who make available cryptocurrency in an investment menu or brokerage account are, in effect, telling participants that experts have approved the option as prudent.
  • The SEC staff has cautioned that investment in cryptocurrency, including the wide range of digital assets, is highly speculative (see Spotlight on Initial Coin Offerings and Digital Assets I, https://www.investor.gov/additional-resources/spotlight/spotlight-initial-coin-offerings-and-digital-assets).
  • Cryptocurrency investments present significant risks of fraud, theft and loss, and may be restricted by law enforcement (see Financial Trend Analysis, https://bit.ly/3w9QTnb, noting ransomware payments made in bitcoin).
  • Fiduciaries can expect to field questions and document requests about their fund selection and investment policy as part of an investigation into a cryptocurrency investment in a 401(k) plan.

Given the above, it would appear that cryptocurrency is not a prudent investment alternative for a 401(k) plan at this time. Accordingly, it is advisable for 401(k) plan sponsors and their retirement plan committees not to add cryptocurrency to their investment menus. If it has already been added, it is advisable for plan fiduciaries to remove such investments given the current regulatory position.

401(k) plan fiduciaries must take their duties of responsible fund selection and responsible stewardship seriously.


Sheldon M. Geller, JD, CPA, is the president and managing member of Stone Hill Fiduciary Management, LLC, Great Neck, N.Y, and a member of The CPA Journal Editorial Advisory Board.

Company The CPA Journal
Category FREE CONTENT;ARTICLE / WHITEPAPER
Intended Audience CPA - small firm
CPA - medium firm
CPA - large firm
Published Date 09/14/2022

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