With the increase in attention that virtual currencies have received over the past few years, many wonder if that means they will start to be offered in 401(k) plans. This issue is very complex with many different agencies and firms on both sides of the argument trying to get their way.
US Department of Labor releases CAR No. 2022-01
The U.S. Department of Labor recently released guidance regarding virtual currencies in 401(k) plans. Compliance Assistance Release No. 2022-01 was released March 10, 2022 in response to the agency becoming aware of firms marketing cryptocurrencies as potential investment options in 401(k) plans. The DOL states that, “Under ERISA, fiduciaries must act solely in the financial interests of plan participants and adhere to an exacting standard of professional care” and that “plan fiduciaries must exercise extreme care.” This is one of many issues plan administrators will have to face regarding offering cryptocurrency investments in their plans. The most prominent issue is the severe volatility that virtual currencies can have from day to day.
The SEC considers cryptocurrency to be highly speculative due to the many uncertainties associated with these assets. The main concern is how to value such investments. Many experts have disagreements on how to value cryptocurrency investments, such as Bitcoin. This is because no sound model exists, in contrast to the traditional discounted cash flow analysis used for equities or the multiple models used for valuing debt.
A second concern raised by the DOL is the lack of knowledge plan participants have regarding investing in virtual currencies. The DOL states, “When plan fiduciaries, charged with the duties of prudence and loyalty, choose to include a cryptocurrency option on a 401(k) plan’s menu, they effectively tell the plan’s participants that knowledgeable investment experts have approved the cryptocurrency option as a prudent option for plan participants.” This may cause many plan participants to believe that experts have determined cryptocurrency investments are a sound and reliable retirement option.
Proponents of Virtual Currency in 401(k) Plans
Many believe that if virtual currencies were allowed in 401(k) plans, it would be a huge victory for both the crypto industry and plan administrators. By offering virtual currencies in 401(k) plans, it would allow greater access and recognition to cryptocurrency as a viable option. Allowing this type of investment has large upside, though the downfall can be just as large.
Fidelity, the largest 401(k) plan administrator in the US, is now allowing cryptocurrency into some of the plans they administer. They believe that “investment choices and opportunity to get access to digital assets is going to increase over an entire spectrum of products and services.” However, Fidelity isn’t the first to offer a cryptocurrency option. In 2021, ForUsAll paired with Coinbase Global (COIN) to let plan participants invest up to 5% in cryptocurrencies.
In the end, many questions still remain as to whether plan administrators will start allowing virtual currency in 401(k) plans they offer. Many people are on both sides of the argument, and with regulations and guidance evolving daily, there is still too much uncertainty regarding this issue.