As a retirement plan sponsor, hopefully you have access to wise and professional advice and services to assist you with the responsibility of stewarding the savings of your employees. Nonetheless, ultimately the responsibility for plan decisions, including the third party advisors and administrators you choose, remains with you as an ERISA fiduciary. Because you can never eliminate this responsibility, always be careful as you vet and sign off on plan options. Read on for guidance on cryptocurrency considerations.
Investment Management: Best Practices
As an emerging asset category, cryptocurrency offers potential for growth, but comes with unique risks. At Plan Sponsor Council of America, Tom Welsh, a Senior Fiduciary Analyst from Broadridge, recommends using standard best practices in fiduciary investment management when vetting options to integrate cryptocurrency into employer sponsored retirement plans, and offers examples of doing so, including these:
- Lack of Regulation and Oversight: Cryptocurrency markets operate with minimal regulatory oversight….This lack of regulation exposes retirement plans to amplified risks, including market manipulation, fraud, and security breaches….Without established regulatory frameworks, investors may face challenges in seeking recourse in the event of malfeasance or loss.
- Volatility and Risk:…Price fluctuations in digital assets can result in substantial gains or losses within short periods, undermining the stability of retirement portfolios. Advisors should understand the expected volatility and communicate it to the client.
- Due Diligence: ….Fiduciaries are responsible for ensuring that investment options adhere to fiduciary standards, including a prudent due diligence process to select each service provider…. Despite potential requests, fiduciaries are not obligated to add any particular investment to a retirement plan menu.
- Complexity and Accessibility: Cryptocurrency investments can be complex and challenging….Fiduciaries must provide clear and transparent communication to educate participants about the risks and benefits of cryptocurrency….
Pointing out that the “long-term viability of cryptocurrency as a retirement investment remains uncertain,” Welsh also cautions: “While some proponents tout its potential for diversification and growth, others warn of its speculative nature and inherent risks. Fiduciaries must critically evaluate the role of cryptocurrency within retirement portfolios, considering its historical performance, correlation to traditional assets, and comparison to appropriate market and peer group benchmarks.”
Good To Know
As a retirement plan sponsor, it’s always best to be up to speed on guidance from the Department of Labor, and you’ll find this Compliance Assistance Release No. 2022-01 from the Employee Benefits Security Administration helpful when considering cryptocurrency as an option.
ERISA law experts also remind plan sponsors that when making any and all decisions on behalf of the plan, it is necessary to keep fiduciary basics—like prudence and loyalty—front and center. Specifically, plan sponsors must “be sure they understand any option before selecting it” and clearly communicate the benefits and costs to participants:
Despite all the new products available to plans, “underneath it all, the same standards apply: prudence and loyalty,” says David Levine, a partner in the Groom Law Group, referencing the core fiduciary obligations under ERISA. The retirement world is constantly evolving, and “there are always new solutions as people try to address what people perceive as room for enhancement,” Levine says. Sponsors should evaluate the direct and indirect costs, the outcomes and the recordkeeping requirements of any option they are considering…..It is equally important to document this process to create evidence of ERISA compliance in the event decisions are questioned.
Given their inherent fiduciary responsibilities, plan sponsors must also continuously monitor plan performance, and that includes assessing the prudence of newly added options. While acting diligently on behalf of the plan and participants, sponsors are also wise to remember that they can be held personally liable in the event of a fiduciary breach. Moreover, although ERISA bonds are required by the DOL, they do not protect plan sponsors in the event allegations are made.
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