Fidelity Investments recently announced that it is making a Bitcoin account available as an investment option for 401(k) plans, fueling a debate over cryptocurrencies and fiduciary responsibilities under ERISA.

In what could have been a preemptive strike, the Department of Labor’s Employee Benefits Security Administration (EBSA) — the ERISA Title I enforcement agency — weighed its analysis on the issue shortly before Fidelity’s announcement. EBSA Compliance Assistance Release No. 2022-1, March 10, 2022. EBSA is, at best, skeptical of cryptocurrency as an investment option in the 401(k) plan, citing among other concerns the volatility of cryptocurrency and what the EBSA says is the vulnerability of cryptocurrency to fraud and theft. Perhaps more relevant to plan trustees than what the communiqué says about possible fiduciary considerations is what EBSA had to say about EBSA’s enforcement stance. Presumably in an effort to dampen enthusiasm for cryptocurrency as a 401(k) option, EBSA warns that “EBSA plans to conduct a program of investigation targeting plans that offer participants investments in cryptocurrencies and related products, and to take appropriate measures to protect the interests of plan participants and beneficiaries with respect to such investments.

Fidelity has defended its decision to offer Bitcoin as a 401(k) investment option. Media reported that Fidelity had met with EBSA officials to address EBSA’s concerns but, according to media reports, EBSA remains unconvinced.

The subject is complicated. The landscape of measuring fiduciary conduct when screening investment offers in a 401(k) plan changed significantly with the January 2022 Supreme Court ruling in Hughes v. Northwestern University. Other issues involved in the cryptocurrency/401(k) debate include:

  • Compliance with ERISA §404(c), which generally limits fiduciary exposure when a participant directs an investment, but subject to certain requirements that might be difficult to meet for a cryptocurrency account.
  • The management fees associated with a cryptocurrency account, and whether these fees may be considered excessive compared to investment management fees for other investments.
  • Valuation issues, particularly to meet the plan’s Form 5500 annual reporting requirements.
  • Whether having a cryptocurrency account could make the plan a more attractive target for plaintiffs’ ERISA class action attorneys.
  • Possible fiduciary liability insurance issues.
  • The fiduciary implications of including a cryptocurrency option through a self-directed brokerage window rather than as a core fund offering.

There’s no doubt that cryptocurrency has been a hot topic for the past few years, and now that hot topic has moved to the 401(k) arena.

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