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Should Employer Plans Offer Cryptocurrency?

fingers holding a bitcoinHere at Safeguard Advisors, we have been helping individuals use self-directed IRA and Solo 401(k) plans to invest in Bitcoin and other cryptocurrencies since 2015.

One of the key benefits of a self-directed retirement plan is the ability to invest in anything the IRS rules allow for, and to select the investments you deem most likely to help protect and grow your retirement savings.

Since the IRS views virtual currency as property per IRS Notice 2014-21, holding digital assets as an investment within an IRA or Solo 401(k) is allowed.  There is nothing about virtual currencies that cause them to be considered a prohibited investment such as life insurance or collectibles.  The logic of IRS rules for IRA investments is that anything not prohibited is allowed.

Because Bitcoin, Ethereum, and other cryptocurrencies are allowable assets, the decision to invest is left to the IRA or Solo 401(k) account holder.  In an individually managed plan, that makes sense.

But what about employer 401(k) plans?  Is it prudent for an employer to offer digital assets as an investment choice for their employees?

In the last few months, we have seen some back and forth between Fidelity Investments and the Department of Labor on this topic.  While there is no direct impact on self-directed IRA or Solo 401(k) plans, it is an interesting discussion that may have far reaching implications for the growth of the digital asset class.

Fidelity Announcement

Fidelity Investments announced on April 26th they will be offering a Digital Assets Account feature within the 401(k) plans they administer for over 23,000 companies starting this summer.

Employers must opt-in for their employees to have access to this new feature.  The maximum allocation to digital assets will be 20% of contributions as set by Fidelity.  An employer can set a lower threshold if they choose.

The only offering will be Bitcoin, with trades occurring at a once daily set-price.  Storage will be managed by Fidelity.

For investors who want limited access to Bitcoin in their retirement plan without having to deal with the technology hurdles of establishing an exchange account and secure storage, this may be an appealing option.

But will employers make the choice to enable this feature?  It is not a simple decision.

Department of Labor Warning to Plan Sponsors

Before Fidelity made their announcement, the Department of Labor sent up a warning flare to employers who sponsor 401(k) and similar retirement plans.  On March 10th, the DOL issued a Compliance Assistance release No. 2022-01on 401(k) Investments in Cryptocurrencies.

The memo reminds employers that as plan fiduciaries, they “must act solely in the financial interests of plan participants and adhere to an exacting standard of professional care.”  A breach of such fiduciary duty can expose an employer to personally liability for plan losses.

In urging caution, the memo states: “the Department 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 concerns are based on the speculative nature of cryptocurrency, the difficulty for average investors to make informed decisions, and other regulatory uncertainties around valuation and record keeping.

In closing, the memo notes that the Employee Benefits Security Administration (EBSA) plans to investigate employer plans that offer cryptocurrency investments, and to take appropriate action to protect the interest of plan savers.

A Hard-Hitting Response from Fidelity

On April 12th, Fidelity sent a strongly worded letter to EBSA asking them to revise or retract Compliance Assistance Release 2022-01 (CAR).

Fidelity takes issue with two key tenets of the CAR that are outside of ERISA or current guidance:

  • That a specific asset is categorially considered an imprudent investment.
  • That assets in a self-directed brokerage window fall under the fiduciary oversight of a plan sponsor.

Fidelity argues that ERISA rules and prior case law surrounding the matter of fiduciary prudence speak to methodology, not to specific assets.  ERISA does not grant the Department of Labor the authority to make a decision about the appropriateness of a specific investment.  That decision should be left to plan sponsors, who must thoughtfully evaluate the matter with the best interest of their employees and plan beneficiaries in mind.

Fidelity also notes the memo places an obligation on plan fiduciaries to assess the prudence not only of “designated investments” offered by a plan, but also assets than an individual investor may choose from a self-directed “brokerage window”.  Such brokerage windows can include most any available investment.  This extension of responsibility is significant and could potentially apply to any investment available in a self-directed brokerage window, not just cryptocurrency.  Again, this new guidance would be in conflict with current guidance from the DOL.

So Where Does This Go?

It seems that Fidelity is ready to strike out on a new path and attempt to get the regulators to follow along.  Fidelity’s Dave Gray stated, “We clearly have different views than the Department of Labor in terms of the guidance they’ve issued. We believe they should withdraw that guidance.”

Will employers choose to take the risk of having the EBSA interrogate them and question their fiduciary responsibility by making cryptocurrency an investment option?

Will employees sue their employer the first time Bitcoin has a 10% drop in one day or a sustained period of losses?

Our guess is that very few employers other than those led by true crypto enthusiasts will choose to include the Digital Asset Account.  When you consider that Fidelity controls more than a third of the US retirement plan market at a value of about $2.4 trillion in 2020, even a small shift towards Bitcoin could create significant price movement.

We applaud Fidelity for their forward thinking and planning for the next generation of investors, and will be interested to see where this leads.

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