The U.S. Securities and Exchange Commission (SEC) recently approved applications from large investment firms to offer spot bitcoin exchange-traded funds (ETFs). Retail investors can now buy bitcoin ETFs on traditional exchanges instead of crypto-specific exchanges or trading in even more volatile crypto futures. The SEC’s approval comes as a reversal, due in large part to a recent court ruling, from its prior denial of these applications.
Many of the big institutional investment firms that frequently see their products offered in 401(k) plans, like Fidelity and Blackrock, have created bitcoin ETFs, which will make it easier for investment fiduciaries to add these ETFs as an option in workplace retirement plans.
But should they?
In guidance from March of 2022, the U.S Department of Labor (DOL) said it has “serious concerns” about crypto in employer-sponsored retirement plans, and investment fiduciaries should exercise “extreme care.”
Choosing investment options to offer in a 401(k) plan is a fiduciary function — even if participants make their own choices from those options. In choosing the investment options, fiduciaries must adhere to duties of prudence and loyalty — the “highest known to the law” — and risk personal liability.
When fiduciaries add crypto as an investment option, the DOL says, it tells participants that knowledgeable investment experts see it as a prudent option for retirement investing. But the DOL has several reasons why it may not be prudent, and the concerns persist even if bitcoin is offered solely through a brokerage window.
First, crypto investments are extremely volatile and speculative and can cause devasting losses to participants — especially those nearing retirement.
Second, it is very difficult for participants to make informed investment decisions given the craze over above-market returns. Plan participants, who are generally not investment experts, may expect high returns without fully appreciating the risk of loss to retirement assets. It is extremely difficult, even for professionals, to “separate the facts from the hype.”
Finally, the DOL expressed concerns with the reliability and accuracy of valuations, the way crypto is custodied (or not), and the evolving regulatory environment.
Plan sponsors should fully understand the fiduciary risk before allowing any plan assets (including through a brokerage window) to be invested in crypto — including the new ETFs — and expect to be questioned by the DOL about the prudence of the decision.