Some Crypto Commentary…

Nevin E. Adams, JD

In the interests of spurring some discussion (and perhaps a few thousand “clicks”), some thoughts on cryptocurrency and its (current) place within retirement plans.

Crypto Is Not ‘a’ Thing

First and foremost, “crypto” is not one thing, it’s several “things”—and there’s enough difference in those things to not only warrant discussion, but separate treatment/considerations, both by the regulatory agencies, and in consideration as a retirement plan investment—and that was before all the recent controversy. 

Moreover, some of what’s being put forth right now is, on the outside, anyway, a pretty traditional security (say, an ETF), albeit one that holds within it some kind of underlying crypto holding—which means it might trade via traditional means, but still have the potential/volatility. Until you know (and appreciate) the difference(s), it’s probably a good idea to wait until you do.

The DOL Didn’t Prohibit Crypto in Retirement Plans

In fairness, you’d have to be pretty obtuse to read Compliance Assistance Release No. 2022-01 as anything less than a strong cautionary note against putting cryptocurrency as a direct investment option in a 401(k) menu—or even as a self-directed brokerage option (more on that in a minute). That said, and while the DOL not only said fiduciaries must “exercise extreme care” in making that kind of option available, but that those who chose to do so “should expect to be questioned” about that decision, and the factors underlying it, they didn’t (yet) prohibit those decisions outright. Though of course they still might. 

The Decision to Offer Crypto as a Platform Option is ‘Different’

Beyond the initial cautions from the DOL, what seems to have really stirred the pot is the recent announcement by Fidelity—the nation’s largest recordkeeper—that—in the face of the DOL’s caution—it would add crypto as an option on its platform later this year. Of course, Fidelity has the "luxury" of adding this option to their platform without the fiduciary responsibility for choosing to add it to a plan—that remains on the plan sponsor/fiduciary... and presumably the fiduciary advisors who help them make that determination. Granted, their decision to do so sends a “signal”—and certainly as the nation’s largest recordkeeper—it opens that door wide to those who are making a fiduciary decision to put it on a plan menu.

The Plaintiffs’ Bar Has Already Taken Note

Asked for his assessment just after the Fidelity announcement, Jerry Schlichter said that “plan sponsors offering Bitcoin in-plan as part of the core investment menu would expose the plan, investment committee[,] and plan participants with myriad risks,” foreseeing that “plan sponsors could be vulnerable to greater litigation risks from the plaintiffs’ bar.” Oh, and he went on to explain that “I don’t see a way at the current time that a plan sponsor can say it’s in the exclusive best interest of employees to invest in a new kind of investment vehicle that has no long-term track record, that has hefty fees 20-times higher than index funds[,] and has lost 40% of its value in the last six months.” 

He went on to comment that this “sea change” may, in fact, have been prompted as an opportunity for Fidelity (and other providers) to “recoup money lost as [they’ve] lowered their recordkeeping fees” in response to litigation calling attention to excessive fees in retirement plans. Jerry ultimately described this new avenue as a “whack-a-mole effort to find other revenue sources in 401(k) plans.” 

Are Industry Marketing Campaigns Over-Promoting?

The Trump administration’s DOL cited concerns about marketing promotions on ESG in issuing its first proposal on the subject, as did the Biden administration in clarifying what it intended in its private letter ruling regarding private equity investments in DC plans—and now with regard to crypto currency. 

So, what should you (and your plan sponsor clients) do? Well, ultimately, it had better be prudent, well-considered, documented—and in the best interests of plan participants and beneficiaries.