I’ll admit I don’t completely understand Cryptocurrencies or “Crypto” for short. And without wanting to sound immodest, I’m not unintelligent or inexperienced in the world of investments or employee benefits, business, or the law. Therefore, I will not try to explain it or how it works in this brief blog articles, there are plenty of other articles you can find on the Internet that do that. I do know that there are over 17,000 Cryptos. I also know that Crypto is not actual currency, at least not in the United States (Bitcoin, the first and largest Crypto is now the official currency of El Salvador). That means it is not legal tender for all debts in the U.S. like cash. I also know that it is quite volatile subject to large changes in its value.
Recently, there has been a big push in the media to encourage Americans to invest in Crypto. In fact, a commercial starring Matt Damon premiered during the Super Bowl promoting Crypto.com. Also, providers and plan sponsors are beginning to offer Crypto as an investment on the menu in participant directed 401(k) plans. Last month, the nation’s largest record keeper, Fidelity Investments, announced it will have a product ready in coming months allowing 401(k) participants to direct up to 20% of their account to be invested in Crypto should the sponsoring employer add it to the available menu. Fidelity will begin with Bitcoin but plans to add other Cryptos in the future. Last June, a smaller provider ForUsAll Inc. began offering over 50 different Cryptos via brokerage windows in plans. An April Investopedia survey showed that 28% of millenials expect to invest in Crypto to support themselves in retirement. It is reported that 52 million Americans already invest in Crypto.
Prudence Generally Means Conservative. I’ve had many occasion to advise clients on the legal aspects of riskier plan designs and investments. For example, often when clients want to establish a ROBS plan, I have advised of the risks and many have changed their mind. ROBS stands for Roll Over for Business Start-Up which is a term coined by the IRS to describe a technique to establish a C corporation that adopts a 401(k) plan permitting participant investment in employer stock. The principal owner then rolls over substantial assets from a prior employer plan or IRA, and purchases the C corporation stock to capitalize the business. The term was coined in an internal IRS Memorandum describing all the ways these technically legal designs can be challenged on audit. Beyond the risks identified in the Memorandum, I advise clients on the fact that they are gambling their hard earned retirement assets on a new business venture. If the business fails they lose their retirement fund. There is a reason retirement investing tends to favor conservative less risky strategies with steady growth over time.
The same can be said for such speculative and unregulated investments such as Crypto. Do you really want to put your retirement money at that much risk?
The DOL’s Position. In March the U.S. Department of Labor issued Compliance Assistance Release No. 2022-01 titled 401(k) Plan Investments in “Cryptocurrencies”. In it the DOL cautions plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants. The guidance states that at this early stage in the history of cryptocurrencies, the DOL has “serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies” or other products whose value is tied to cryptocurrencies. These investments “present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss. . .” and cites several reasons including: Crypto’s speculative nature, difficulty for participants to make informed decisions, valuation concerns, lack of but evolving regulatory environment and the fact that losing a password could mean losing the entire investment. The guidance concludes that EBSA is launching an investigative program aimed at plans that offer Crypto investments as part of its menu or through brokerage accounts and that fiduciaries of such plans can expect to be questioned on how offering such investments meet their fiduciary duties of prudence and loyalty in light of the risks.
Proof in the Pudding. On May 12, 2022, the market saw $200 billion in wealth in Crypto lost overnight. Bitcoin has lost 50% of its value since the Superbowl ad ran. Again, I don’t completely understand Crypto but I’ve read that the free-fall in Crypto has been largely tied to the failure of a particular Crypto ironically called a “stablecoin” known as TerraUSD or UST, which is supposed to be pegged one-to-one with the U.S. dollar. However, it somehow lost its peg and is now worth about 14 cents on the dollar. Worse yet another Crypto called Luna is a token closely related to UST and is now worth zero. Again, I don’t completely understand it, but I understand that it is quite volatile and Cryptos have experienced significant losses as a result. So it begs the question:
Why would anyone want to invest in Crypto through a retirement plan? More importantly, why would a fiduciary allow it as an option? Given the current environment, I couldn’t call it a legally prudent investment.