Crypto-determined 401(k) ditches are on the labor inspectorate’s radar
Kibir Hemrajani took the plunge in 2020. He rolled over an old 401(k) into a new type of individual retirement account he’d heard about — a crypto IRA.
Now, the 42-year-old Boston-area video game developer said he has lost more than two-thirds of his principal investment worth tens of thousands of dollars. But Hemrajani is not worried.
“I’ve been through enough boom-and-bust cycles of crypto that I would expect over the next 20 years, when I want the IRA to go up, that it will go up significantly,” he said in an interview.
Hemrajani is part of a new generation of retirees so committed to the prospect of lavish cryptocurrency returns that they’re willing to venture outside the confines of a workplace plan into the arcane and vaguely regulated world of digital IRAs.
However, federal regulators are not giving up without a fight. The U.S. Department of Labor has pushed back hard against crypto investments in 401(k)s and is ramping up a decade-old investment advisory project that could extend those protections to the digital IRA market.
It’s a risky game. The department could emerge with more regulatory tools to crack down on companies that lure retirement investors away from their work plans. The hard-line crypto approach could backfire, however, forcing even more workers to ditch their 401(k)s to access a tax-advantaged asset they can only get with digital IRAs.
“Evoking regulation for rollovers is not a trivial matter,” said Jasmin Sethi, managing director of Sethi Clarity Advisers LLC and associate director of policy research at
Two developing fronts
Digital IRA providers operate in a regulatory gray area, Sethi said. IRAs have lower contribution limits, meaning 401(k) savers can save about three times as much tax-advantaged money.
Senior DOL officials told Bloomberg Law that’s a worrisome difference, especially if 401(k) participants leave the security of their workplace plans in hopes of a quick IRA.
The department’s primary focus “is on these entities that promote investments in cryptocurrency assets,” Ali Khawar, acting DOL assistant secretary for employee benefits, said in an interview. “A big part of our focus will be on rollover and what kind of conversations, what kind of communication, what kind of advice these promoters are actually giving to individuals to get them, to take their money out of the 401(k) area and put it into an IRA.”
The DOL’s Employee Benefits Security Administration had been largely silent on cryptocurrency investments until earlier this year. In the months since it issued guidance strongly objecting to digital currency in 401(k)s, all signs have pointed to a more wholesale regulatory approach to crypto investments in the retirement industry.
“The whole point has been to extend control to the IRA market,” said Matthew Eickman, head of national retirement at Prime Capital Investment Advisors LLC-operated Qualified Plan Advisors.
The project is developing on two fronts. On the one hand, the agency says it is launching an “investigative program” targeting 401(k) plans that allow investors to access crypto (CAR No. 2022-01); on the other, the department is restructuring its definition of fiduciary investment advice to capture companies that help workers and retirees leaving an employer-sponsored 401(k).
When an employee transfers from a workplace plan to an IRA, they step outside the DOL’s traditional authority under the Employee Retirement Income Security Act of 1974 (Pub.L. 93-406). Exactly when that authority ends has been the subject of fierce political battles dating back to the Obama administration, when a rule expanding the definition of fiduciary advice was struck down by a federal circuit court.
“The core common to all of these was, ‘We want to expand ERISA’s reach so that fiduciary obligations apply to the IRA market in a way that has not previously been perceived to apply,'” said Brad Campbell, former DOL assistant. employee benefits secretary and partner at Faegre Drinker Biddle & Reath LLP in Washington.
Market opportunity
Digital IRAs are self-directed accounts that allow participants to manage their investments. Companies say that means the IRA providers are then off the hook as fiduciary investment advisers, regardless of the DOL’s intentions.
Labor regulators’ tough stance on cryptocurrency investing is only steering workplace investors hungry to capitalize on crypto returns into the IRA market, said Brenda Whitman, CEO of Coin IRA LLC, a Los Angeles-based digital IRA provider.
“This is 100% a market opportunity,” Whitman said. “These types of laws and restrictions may reduce participation in 401(k)s in favor of contributing to an IRA where the account holder is in control and has a wider menu of options to choose from that include cryptocurrency.”
Since the department issued its guidance in March, digital IRAs have flooded the Internet with ads claiming “your 401(k)’s investment options are boring.” The most sponsored search results for the keywords “401(k) cryptocurrency” are from digital IRA providers.
“There’s always been this underlying interest from people to get out of their 401(k)s and do something different,” said Chris Kline, co-founder and chief revenue officer at Bitcoin IRA. Kline also said his company is designed as a fintech organization that does not provide financial advice.
Companies have published step-by-step instructions online telling participants how to roll their 401(k) into an IRA without triggering tax penalties from the IRS. Of the companies Bloomberg Law interviewed, between 30% and 50% of total equity investments came from the employer-sponsored space, but many investors choose to keep their 401(k)s to create a more diversified portfolio.
Whether a company calls itself an investment adviser may not matter in the end.
“Whether someone calls themselves a financial advisor or not may matter more to other laws than it does to us,” Khawar said.
