Cryptocurrency in 401(k) Retirement Plans
July 1, 2022
Cryptocurrency in 401(k) Retirement Plans
Digital assets, which include cryptocurrencies, crypto-
Cryptocurrency in Private-Sector DC Plans
assets, or digital tokens, among others, are digital
Until recently, cryptocurrency was not available as an
representations of value and are issued and transferred
investment option for DC plan participants. In 2021,
using distributed ledger or blockchain technology. Bitcoin,
FORUSALL announced that it would be the first financial
Ethereum, and Dogecoin are among the most well-known
services company to offer plan sponsors the option to adopt
cryptocurrencies. A November 2021 Pew Research Center
cryptocurrency as an investment for participants.
and a March 2022 NBC News poll found that around one-
Participants whose plan sponsors adopt FORUSALL’s
fifth of Americans indicated that they had invested, traded,
investment platform can invest up to 5% of their account
or otherwise used cryptocurrency.
balances and direct 5% of their contributions to
cryptocurrency through its brokerage window. In April
In recent months, policymakers have paid increasing
2022, Fidelity announced its intention to allow 401(k)
attention to the prospect of defined contribution (DC)
participants whose plan sponsors adopt it as an investment
pension plan participants being able to invest in
option to invest up to 20% of their account balances in
cryptocurrency. While some contend that cryptocurrency in
Bitcoin.
retirement accounts could benefit participants, others have
expressed concern about its appropriateness as an
Fiduciary Choices
investment option.
Most of the investment options provided by a plan sponsor
in participant-directed plans are designated investment
Defined Contribution Plan Investments
alternatives, which Department of Labor (DOL) regulations
In DC plans, of which the 401(k) is the most common in the
define as “an investment alternative designated by the plan
private sector, workers are provided individual accounts
into which participants and beneficiaries may direct the
funded by their own contributions, contributions from their
investment of assets held in, or contributed to, their
employers, or both. The funds in the account may accrue
individual accounts.” When making decisions about which
investment earnings, which can then be used as a source of
designated investment alternatives to include in a plan, plan
income in retirement. Most DC plans are participant-
sponsors are fiduciaries under the Employee Retirement
directed individual account plans. In these plans, plan
Income Security Act of 1974 (ERISA, P.L. 93-406) and
sponsors (which are usually the employers in 401(k) plans)
must act with prudence (“with the care, skill, prudence, and
choose a number of investment options from the offerings
diligence” that a prudent person would take) and with
of a financial services company, such as the Vanguard
loyalty (“solely in the interest of the participants” for the
Group, Fidelity Investments, or BlackRock. Participants in
purpose of providing benefits). In addition, fiduciaries have
participant-directed DC plans then choose their investments
an ongoing duty to monitor plan investments to ensure they
from among the options that plan sponsors have made
continue to satisfy fiduciary obligations.
available.
Plan sponsors’ fiduciary responsibilities regarding digital
The investment options usually include mutual funds with
currency in retirement plans may depend on the channel
varying characteristics such as index funds (which mirror
through which the investment choice is offered to
the performance of a stock market index such as the
participants. For example, while Fidelity is offering plan
S&P500), small and large cap funds (which invest in small
sponsors the choice to include digital asset investments as
or large firms as measured by market capitalization), bond
part of their investment menus (alongside mutual funds, for
funds (which invest in debt obligations), real estate funds
example), FORUSALL is offering digital asset investments
(which invest in real estate), and target date funds (which
through its brokerage window.
change the investment mix between bonds and stocks as an
individual gets closer to retirement).
While plan sponsors have a duty of prudence and loyalty
when choosing the designated investment alternatives to be
In addition to mutual fund investments, about one-quarter
included in their plans, these duties do not necessarily apply
of private-sector DC plans allow participants to invest via a
to the investments that participants choose in a brokerage
brokerage window. A brokerage window allows plan
window. DOL regulations specifically exclude brokerage
participants to invest in options beyond those provided by
windows from the definition of designated investment
the plan, such as individual stocks and a wide variety of
alternatives. In 2012, DOL issued guidance that indicated
mutual funds. Some plans place restrictions on participants’
that plan sponsors might have an obligation to treat an
investments within brokerage windows, such as limiting the
investment in a brokerage window as a designated
percentage of an individual’s account balance that can be
investment alternative if a certain number of participants
invested in the brokerage window or prohibiting
selected it. However, three months later, DOL removed that
investments in the stock of the employee’s company.
guidance.
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Cryptocurrency in 401(k) Retirement Plans
Responses
provisions, prohibit regulations that would constrain or
prohibit the type of investments that could be offered
Responses from Advocates
through a brokerage window in a DC plan.
Advocates for including cryptocurrency as an investment
option in retirement plans provide several reasons for why
A provision in S. 4356, introduced by Senators Kirsten
it is an appropriate investment option. They note that it is a
Gillibrand and Cynthia Lummis, would require the
widely-used asset class outside of retirement plans. In
Government Accountability Office (GAO) to examine the
addition, cryptocurrencies may provide diversification
use of cryptocurrency and digital assets in retirement plans.
benefits to an investment portfolio, potentially reducing a
Separately, Representative Richard Neal asked GAO to
portfolio’s risk without necessarily harming the portfolio’s
examine the use of cryptocurrency in retirement plans in a
return. Advocates also claim that younger individuals may
June 15, 2022, letter.
be more likely to participate in workplace retirement plans
if investment choices include cryptocurrency.
Brokerage Windows and DC Plan
Investments
March 2022 DOL Guidance
As a result of the possibility of 401(k) plan participants’
On March 10, 2022, DOL released a Compliance
investments in cryptocurrency, broader policy issues
Assistance Release, 401(k) Plan Investments in
surrounding brokerage windows have resurfaced.
“Cryptocurrencies,” in which the department expressed
Brokerage windows are not designated investment
“serious concerns” about plan fiduciaries’ decisions to
alternatives. While plan sponsors might have a duty to
allow DC plan participants to invest in cryptocurrencies.
monitor the brokerage window provider, plan sponsors do
The release identified a number of areas of concern. The
not have a duty to monitor participants’ investments
concerns included the potentially speculative nature of
purchased through a brokerage window. This could lead to
cryptocurrency investments, the difficulties individuals
participants paying high fees for investments chosen
might have in evaluating whether to—or how much to—
through a brokerage window.
include in their investment portfolios, recordkeeping
challenges, valuation concerns, and the regulatory
A 2021 report from DOL’s ERISA Advisory Council noted
environment.
the issues associated with brokerage windows in DC plans.
Brokerage windows can allow sophisticated investors to
The release indicated that DOL planned to conduct an
construct investment portfolios more appropriate to their
investigative program aimed at plans that offer such
individual circumstances than they could by using a plan’s
investments and that plan fiduciaries could expect to be
designated investment alternatives. For example, a
questioned by DOL about their decisions. Subsequently, a
brokerage window might allow participants to invest in
DOL official noted that plans that allow their participants to
mutual funds that have environmental, social, and
invest in cryptocurrency will not be automatically subjected
governance (ESG) goals, faith-based goals (such as those
to an audit.
based on Christian or Sharia principles), or in individual
stocks. However, participants with less sophisticated
Industry Response and FORUSALL Lawsuit
investment knowledge could make investments that would
In response to DOL’s Compliance Assistance Release, 11
be inappropriate for their circumstances.
trade associations wrote to DOL on April 12, 2022,
requesting that it be withdrawn and that guidance be
For Further Information
developed via the rulemaking process. In addition, on June
CRS Report R47152, Private-Sector Defined Contribution
2, 2022, FORUSALL filed suit seeking to vacate the
Pension Plans: An Introduction
Compliance Assistance Release on the grounds that the
guidance violated the Administrative Procedure Act.
CRS Report R46208, Digital Assets and SEC Regulation
Selected Responses from the 117th Congress
Compliance Assistance Release No. 2022-01 401(k) Plan
In a May 4, 2022, letter, Senators Elizabeth Warren and
Investments in “Cryptocurrencies,” https://www.dol.gov/
Tina Smith asked Fidelity to respond to several questions
sites/dolgov/files/ebsa/employers-and-advisers/plan-
regarding its decision to add Bitcoin to its 401(k)
administration-and-compliance/compliance-assistance-
investment menu. The Senators asked about the reasons
releases/2022-01.pdf
Fidelity “ignore[d],” the letter said, DOL’s concerns
regarding cryptocurrency in DC plans; Fidelity’s
Understanding Brokerage Windows in Self-Directed
assessment of the risk Bitcoin presents to its customers; the
Retirement Plans, ERISA Advisory Council,
fees that customers will incur; and Fidelity’s earnings and
https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/
potential conflicts of interest arising from its involvement in
about-us/erisa-advisory-council/2021-understanding-
cryptocurrency mining. Fidelity responded that it looked
brokerage-windows-in-self-directed-retirement-plans.pdf
forward to having a respectful dialog with policymakers
and that it would respond directly.
John J. Topoleski, Specialist in Income Security
The Financial Freedom Act of 2022 (S. 4147, introduced by
Elizabeth A. Myers, Analyst in Income Security
Senator Tommy Tuberville, and H.R. 7860, introduced by
IF12153
Representative Byron Donalds) would, among other
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Cryptocurrency in 401(k) Retirement Plans
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