According to recent reports, cryptocurrency is increasingly being offered by financial firms to workplace retirement plans such as 401(k)s for retirement savers to purchase. If these novel, untested, and speculative crypto assets crash, as several already have,[i] it could expose retirement savers to devastating losses and employers to significant legal risk.
Employers who sponsor workplace retirement plans generally want to make decisions that serve the best interests of their workers. And workers depend on their employer to make careful and sound decisions about what investment products to include in their retirement plan menu. Unfortunately, many employers do not have particular expertise in choosing plan investments. After all, most employers are small business owners, not financial professionals whose main job is setting up and administering retirement plans.
There is evidence, for example, that many employers have difficulty in evaluating the risks and rewards of mutual funds, which are commonly offered in retirement plans. This is the case even though mutual funds are transparent investments, which should enable an informed evaluation of the investment’s financial characteristics, including valuation, cost, risk, and reward. Recognizing their own limitations, many employers seek outside expertise to help them choose the best options for their plan. Employers reasonably believe and expect that the financial firms and professionals they turn to for help are legally required to and will serve the plan’s – and in turn, the workers who participate in the plan’s – best interest. Unfortunately, these financial firms and professionals are not typically legally required, under either ERISA or the securities laws, to recommend the best options for the retirement plans that they serve. Moreover, financial firms and professionals often have conflicts of interest to recommend the options that pay them the most money, rather than the options that are the best for the employer’s workers.
If employers are not up to the task of capably choosing the best mutual fund options for their workers, it likely would be near impossible for employers to make diligent and prudent decisions about whether and how to offer crypto assets to their workers. Given the fact that most employers are not crypto experts, it’s highly unlikely employers would have sufficient expertise about this market to make informed judgments about including crypto assets in their plans. Indeed, the unique features and risks of the crypto market would make it challenging for even those with specialized expertise in crypto markets to make diligent and prudent decisions about offering these assets to retirement savers. For example, these features and risks include:
- Crypto assets can be speculative and volatile investments, with prices that can swing wildly and crash without warning – this volatility can be particularly devastating for investors who are approaching retirement;
- It can be extraordinarily difficult, even for expert investors, to evaluate crypto assets and separate the facts from the hype;
- Crypto-related assets are not held like traditional assets in trust or custodial accounts, which can expose them to heightened risk of fraud, theft and loss – FTX’s recent failure illustrated these risks and the harms that can flow from them;
- Crypto-related assets raise valuation issues because they may not be subject to traditional, empirically-validated valuation methodologies;
- Crypto-related assets may be unregistered or otherwise offered by or through providers who are operating outside of or not complying with existing regulatory frameworks; and
- Crypto-related assets may be subject to additional regulation, which may evolve in unpredictable ways.
Given these particular issues and risks in crypto markets, it’s highly likely employers will rely even more heavily on financial firms and professionals when deciding whether and how to offer crypto assets to their workers. If employers work with a financial firm or professional that has financial incentives to recommend a particular crypto offering, it could be very difficult for employers to understand the nature or extent of those conflicts of interest, factor those conflicts of interest into their decision making, or independently assess the quality of the recommendations they receive.
Ultimately, employers will be legally responsible for the decision to offer crypto assets to their workers. If crypto assets crash and workers experience devastating losses, it is likely that employers will be left holding the bag, even if they were trying to do right by their workers and were merely relying on the expertise and judgment of financial professionals when deciding to offer crypto assets to their workers. In contrast, financial firms and their professionals who recommend crypto to be offered by the retirement plan, in all likelihood, would not be legally responsible for ensuring that the crypto offering that the plan offers is in the best interest of workers. This is because loopholes in the definition of who is a fiduciary under ERISA allow firms to evade their legal obligation to serve retirement savers’ best interest when providing investment advice. Moreover, to the extent that the crypto assets are not considered securities, any recommendations by financial professionals to individual retirement savers would not be covered by any securities law professional standards of conduct.
This unequal treatment of potential liability is neither right nor fair. The financial firms and professionals who offer and recommend crypto to retirement plans are also those best situated to perform the difficult and complex analysis necessary to determine whether it’s in workers’ best interest to offer that crypto asset to retirement savers, and to do so in a way that complies with the law. After all, they are the experts who do this for a living. They should not be immune from accountability for these recommendations and decisions, especially when the financial products they promote can threaten retirement savers’ financial security and foist unnecessary legal exposure onto employers who are trying to serve the best interests of their workers.
These new crypto offerings to retirement plans underscore the need for the Department of Labor to update its fiduciary rule by closing the loopholes in the current rule to ensure that the financial firms and professionals that offer and recommend crypto assets to retirement plans and workers are subject to strong fiduciary duties. These steps would help to ensure that any decisions to offer crypto assets to retirement savers would be made by those with sufficient expertise and ability to do so, and in a way that ensures such decisions are made with the care and soundness needed to guarantee they are truly in the best interest of retirement savers.
[i] See Alexander Osipovich and Caitlin Ostroff, TerraUSD Crash Led to Vanished Savings, Shattered Dreams, The Wall Street Journal, May 27, 2022, https://www.wsj.com/articles/terrausd-crash-led-to-vanished-savings-shattered-dreams-11653649201.