As the work world—and employee expectations—continue changing rapidly, don’t be surprised by a curiosity about the potential for cryptocurrency as an investment option in the company retirement account. There are in fact a growing number of retirement providers offering cryptocurrency. Should you dive in? Legal experts offer guidance.
Investment Choices: Fundamentals
Every investment choice offered to employees in the 401(k) plan must be considered carefully: inappropriate investment choices is a major cause of lawsuits based on claims of a breach in the employer’s fiduciary duties. JD Supra reminds us that specific investment options are not dictated by ERISA law. Instead, ERISA law “instructs fiduciaries to show the care, skill, prudence, and diligence that a prudent person would exercise when choosing an investment option to minimize the risk of large losses.” With this heavy emphasis on the process used to make investment decisions, it’s important that employers carefully follow the provisions of their plan’s Investment Policy Statement (IPS) to select funds, monitor performance and asset allocation targets. It’s important to remember that deviating from the process described in the IPS can result in employer and individual liability for a fiduciary breach.
Too Hot To Handle?
Not surprisingly, experts observe that cryptocurrency as a 401(k) investment option involves risks. As Fisher Phillips explains:
Cryptocurrency doesn’t quite fit the definition of traditional investment vehicles. Depending on how it is drafted, the IPS might be construed as prohibiting cryptocurrency, even if it does not expressly do so. The IPS guidance for selecting investments to offer may not speak to the unique issues involved in evaluating cryptocurrencies and amendments may be required.
Cryptocurrencies have a history of dramatic declines in value, putting the fiduciaries at risk for losses and risking the employer’s public reputation. If fees associated with offering cryptocurrency in the plan are significantly greater than those of the other investments available, the fiduciaries may be at risk for a breach of duty claim (an issue currently pending before the United States Supreme Court).
As plan sponsors, no matter how diligent we are in reviewing investment options and reducing risk, we can never be certain that we won’t be held personally accountable for a breach in our fiduciary responsibilities. Even defense against allegations of a fiduciary lapse is costly and disruptive, with ERISA lawyers costing over $600 per hour. That’s why it is important to obtain fiduciary liability insurance from Colonial Surety Company. It covers the business—and the plan sponsor—against claims of alleged or actual breaches of duty in connection with the employee retirement plan. Colonial even includes cyber liability insurance—and the annual premium for this comprehensive protection is less than just an hour or two with an ERISA lawyer. Get protected now: Choose Your Plan Sponsor Coverage Here.
If and when it becomes important to explore cryptocurrency as an offering in your company’s 401(k)plan, legal experts recommend these steps:
- You should confirm with your 401(k) provider whether providing cryptocurrency is an option.
- You should evaluate the IPS to ensure there are no provisions expressly prohibiting cryptocurrencies from inclusion in the plan.
- You should ensure that fiduciaries follow all steps in their IPS for selection and performance monitoring of new asset class.
- You may want to consider some type of limit on the amount an individual can commit to crypto to reduce potential risk associated with volatility.
- You should keep participation in a Crypto 401(k) optional. Ideally, employees would be able to choose from among a list of cryptocurrencies which they want to hold in their 401(k) portfolios – but most importantly, they must be able to choose whether they want to include them at all.
- Decisions related to retirement investments are arguably the most important an individual can make in their lifetime. You should be sure that you, or your retirement benefits provider, can give employees necessary informational materials on cryptocurrencies to ensure employees aren’t going it alone when making critical investment decisions for their future. Despite the increased popularity of cryptocurrencies, it should not be assumed that a would-be investor knows the difference between a meme coin and the more established coins.
Changing expectations ratchet up the fiduciary risks plan sponsors confront regularly. Protection is a best practice. Colonial’s multi-year packages provide the greatest convenience and value, ensuring continuous compliance and coverage. Packages include:
- The required ERISA bond which protects the assets of the retirement plan from theft;
- Fiduciary Liability coverage to protect you and your assets from personal liability; and,
- Cyber Liability coverage to safeguard your company and plan from covered losses and expenses in the event of a cyber breach.
Colonial Surety Company is rated “A Excellent” by A.M. Best Company, U.S. Treasury listed and in business all across the country. Serving customers since 1930, we are the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors – and keep their businesses compliant – with pain-free, efficient, and friendly service every time.