Cryptocurrency Concerns: Why We’re Working to Protect Retirement Savings from Volatile Digital Investments

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The retirement savings of America’s workers and their families represent years of hard work and sacrifice. The assets held in retirement plans, such as 401(k) plans, are essential to financial security in old age – covering living expenses, medical bills and so much more – and must be carefully protected.  That’s why plan fiduciaries, including plan sponsors and investment managers, have a strong legal obligation under the Employee Retirement Income Security Act to protect retirement savings.  These fiduciaries must act solely in the financial interests of plan participants and adhere to a high standard of care when managing plan participants’ retirement holdings.

In recent months, some financial services firms have begun marketing investments in cryptocurrencies as potential investment options for participants in 401(k)s.  At this early stage in the history of cryptocurrencies, however, the U.S. Department of Labor has serious concerns about plans’ decisions to expose participants to direct investments in cryptocurrencies or related products, such as NFTs, coins, and crypto assets.

President Biden’s recent executive order on ensuring responsible development of digital assets highlights the significant financial risks digital assets can pose to consumers, investors and businesses in the absence of appropriate protections.  Cryptocurrency has gained mainstream popularity and notoriety, but there is still great uncertainty about how the market will develop, and little agreement on investing fundamentals relating to cryptocurrency. 

Cryptocurrencies can present serious risks to retirement savings, including: 

  • Valuation concerns. Financial experts have fundamental disagreements and concerns about how to value cryptocurrencies.  These concerns are compounded by the fact that cryptocurrencies are not typically subject to the same reporting and data integrity requirements that apply to more traditional investment products. Scammers have used misleading information to inflate the price of cryptocurrencies, and then sold their own holdings for a profit before the value of the currency drops.
  • Obstacles to making informed decisions.  These investments can easily attract investments from inexperienced plan participants with expectations of high returns and little appreciation of the risks the investments pose.  It can be very hard for ordinary investors to separate fact from hype.  When fiduciaries include a cryptocurrency option on a 401(k) plan menu, it signals to participants that knowledgeable investment experts have approved it as a prudent option. This can mislead participants about the risks and cause big losses.  
  • Prices can change quickly and dramatically. Cryptocurrencies’ prices have been extremely volatile.  For example, in just one day last December, the price of bitcoin dropped by more than 17 percent. These large swings can leave participants vulnerable to significant losses.
  • Evolving regulatory landscape. Laws and rules are swiftly evolving. For example, the president’s recent executive order directs federal agencies to study risks and policy approaches to digital assets, including cryptocurrency. Changes in the United States and globally may impact existing regulatory frameworks.

Based on these concerns, the department has issued a compliance assistance release for plan fiduciaries focused on 401(k) plan investments in cryptocurrencies. The release cautions plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants. We are continuing to monitor developments and remain committed to protecting the life savings of America’s workers and their families.

Ali Khawar is the acting assistant secretary for the Employee Benefits Security Administration.