In HR Dive’s Mailbag series, we answer HR professionals’ questions about all things work. I have a question? send to [email protected].
Q: Should we add crypto investment options to our 401(k) menu?
A: There is no simple answer to this question, according to Fisher Phillips partner Phillip C. Bauknight, who chairs the company’s blockchain and cryptocurrency practice group. Instead, the question requires individual employers to weigh the risks of cryptocurrency investment options against the potential rewards.
The first and most obvious consideration for employers to consider is the regulatory landscape that sits at the intersection of crypto offerings and 401(k). In March, the US Department of Labor’s Employee Benefits Security Administration. issued guidance warning 401(k) plan fiduciaries to “exercise extreme care” before adding a cryptocurrency option to their plan’s investment menu. The EBSA guidance questioned the “prudence” of a fiduciary’s decision to expose plan participants to risks associated with cryptocurrencies and reminded fiduciaries of their duty under the Retirement Income Security Act. Employees “act solely in the financial interests of plan participants and adhere to a high standard of professional care.”
The management’s position should factor heavily into an employer’s decision regarding cryptocurrency and retirement investing, Bauknight told HR Dive in an interview. “When you’re assessing your risk tolerance, you have to decide your appetite: are you going to go full throttle and pursue this regardless of current suggestions, or do you want to wait?”
Bauknight highlighted a particular section of the guide: EBSA’s plans for a “research program” designed both to examine plans offering cryptocurrency investments and to spur action that protects participants and beneficiaries. Fiduciaries that oversee or allow crypto investment options “should expect to be asked how their actions can square with their duties of prudence and loyalty in light of the risks outlined above,” EBSA wrote.
Most employers don’t understand what an EBSA investigation entails, Bauknight said. The agency may initiate an investigation into complaints, media reports, and enforcement initiatives. The trustee will learn of the investigation when they receive a subpoena for documents or when EBSA itself conducts a site visit to conduct interviews.
“An employer that wants to go down this road would have to understand that this is what an investigation entails,” Bauknight said, emphasizing the importance of taking the necessary steps to meet the standard of care.
Of course, the DOL warning has been rebuffed. A provider of retirement plans sued the DOL on June 2, claiming that his warning was “arbitrary and capricious” and exceeded the limits of his authority under ERISA. The agency violated federal law by issuing its position through guidance, rather than promoting it through the formal rulemaking process, the plaintiff said.
The complaint pointed to strong demand to add cryptocurrency investment options to retirement plans, a demand that dropped significantly when the DOL released its guidance in March. Although most plans remain interested in adding cryptocurrency options, about a third will no longer pursue the options due to “enforcement threats” from the DOL, according to the complaint.
The complaints against the DOL are part of the process to achieve regulatory clarity, Bauknight said. Consumers and regulators must find a balance that satisfies those who want cryptocurrency options and those who want to protect participants from associated risks.
As this process progresses, employers will have to weigh the factors when evaluating the benefits, which are numerous and significant, Bauknight said.
Workers have increasingly expressed demand for crypto products. The pandemic fueled some of this demand, Bauknight suggested. “The pandemic really changed things for everyone and forced everyone to reevaluate their priorities,” he said. “The ability to have offerings [of] Cryptocurrency products give the employee more control over when, how and in what form they are paid for their services.”
Meeting this demand can give employers an edge as they compete for talent, especially in industries that value innovation. Offering cryptocurrency options in 401(k) plans could “provide an incentive for certain categories of applicants and workers,” Bauknight said.
Crypto Options and Employer Responsibilities
Regulatory battles and broader discussions raging around cryptocurrency and 401(k) options may encourage employers to revisit some of the basics of employee benefits. While the basics refresh employers on their responsibilities, they also offer some advice on how to proceed in the strongest possible way when adding cryptocurrency options to their menu.
When it comes to 401(k) plans, plan sponsors are the ones who hold the assets in trust, Bauknight said. Under ERISA, the people who make decisions about the plans are the fiduciaries. And fiduciaries, as ERISA sets forth in its guidance, must act solely in the best interest of plan participants. That means employer plan sponsors and fiduciaries are required by law to monitor plan investments and weed out any choices that are unwise, Bauknight said.
It is important to note that ERISA does not dictate to fiduciaries what decisions to make. Rather, it forces them to minimize the risk of big losses.
“That’s where crypto comes in — there’s a concern about protecting people from huge losses,” Bauknight said.
One of the most common reasons participants sue their employers in the area of benefits is for improper investment decisions, he noted. Cryptocurrencies have a history of strong rises and sharp falls. It’s not a typical investment vehicle, and its inclusion in the 401(k) menu can cause employers to stray from its investment policy statement, which most employers use to guide investments. IPS deviation could serve as evidence that an employer has breached his duties, Bauknight said.
Together or alone, this could create the risk of a breach of duty claim, Bauknight said. Still, ERISA does not prohibit cryptocurrencies as an investment option in 401(k) plans, and the option could attract talent and increase retention.
Bauknight offered several suggestions to employers who have chosen to add cryptocurrency to their set of 401(k) investment options:
- Confirm with the provider that cryptocurrency is an option.
- Evaluate the IPS to ensure there are no provisions prohibiting cryptocurrencies.
- Make sure trustees follow all IPS steps in selection.
- Consider some sort of limit on the amount someone can put into crypto investments.
- Keep participation optional.
- Make sure employees receive educational materials on new investment options.