Crypto in 401 (k) plans: Why trustees should be careful

The legal landscape surrounding the Employee Retirement Income Security Act of 1974 (ERISA) is somewhat stinging at the moment. Employers are facing an increase in lawsuits alleging ERISA breach of trust based on investment options and administrative fees in 401 (k) plans.

“During this time, employers are being sued for offering the alleged funds with the wrong target date, as perhaps another fund with lower cost ratios could be offered. It is one of the most vanilla investment deals out there,” said Wendy Von Wald (pictured), product manager for trust at Travelers “Crypto is an incredibly volatile investment, and there are major concerns about how it is valued and regulated, so you can see why plan sponsors may be reluctant to add it to the 401 (k) investment range.”

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Under ERISA, managers are required to make “prudent” investment decisions that minimize the risk of large losses and act in the best interests of planholders. Courts have often referred to ERISA’s prudence and loyalty obligations as the “highest known to the law”. The volatility of cryptocurrencies and the potential for negative value fluctuations can be considered risky to be sensible investment choices.

Managers must be careful to monitor not only the investment but also the provider of that investment, and because crypto can be offered in regulated and unregulated forms, trustees must be careful to make sure they know what entity is actually offering crypto, something that can be difficult these days, “said Von Wald.

“It’s not just a volatility problem; It is also an evaluation issue as there are many different ways to value crypto. Managers must consider what value assessment they use, and whether it can be challenged along the way. One of the duties of a shop steward is to ensure that they act in the best interests of the participants, and this includes postponing costs and removing volatility. Crypto does not seem to be well suited to trustees who fulfill their obligations under ERISA. “

In March 2022, the US Department of Labor (DoL) issued “Compliance Assistance” for firms that market investments in cryptocurrencies to 401 (k) plans as potential investment options for plan makers. DoL warned the plan’s trustees to “exercise extreme caution” before adding crypto to a 401 (k) plan investment menu.

“At this early stage in the history of cryptocurrency, the department has serious concerns about the caution in a trustee’s decision to defer participants in a 401 (k) plan for direct investment in cryptocurrencies, or other products whose value is linked to cryptocurrencies. DoL warned. “These investments pose significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft and loss.”

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ERISA does not dictate which specific types of investment options must be included in a 401 (k). Employers are allowed to offer crypto investments if they have done their due diligence and are in compliance with ERISA. They may be subject to revision if they actively support and encourage plan makers to invest in crypto.

Many employers use an Investment Policy Statement (IPS) to help manage the 401 (k) administration of plan trustees. If they are considering offering crypto as an investment option, Von Wald said it would be wise to have IPS reviewed by external advisors to ensure it is suitable for crypto. This is an important risk management practice.

“Setting parameters on the amount of investment in a particular crypto can be a way for plan sponsors to protect themselves from risk. Just allowing crypto to be offered as part of a broker window can be another way to protect some of their actions and decisions,” »La Von Wald til.

“It is also important for plan managers to provide clear disclosures and to educate plan makers about the risks of crypto, and at an even more basic level, about the purpose of a 401 (k). 401 (k) is not meant to be a day trading account; it “is meant to be something people finance so that they have an income to live on during retirement. I believe that basic education about the purpose of a 401 (k) is important right now.”

At present, unit-linked insurance does not usually exclude specific investment options. However, if there is an increase in litigation around 401 (k) plan investments in cryptocurrencies, guarantors can address this exposure in a number of ways, according to Von Wald, including cryptocurrencies, higher retention, lower coverage limits and increased premiums.

“It’s still relatively new, so I have not seen much enforcement activity in the market,” she said, “but all of these are things that can happen … if there is any frequency of lawsuits alleging infringement of ERISA because of the offer of crypto as part of a 401 (k) plan. “