U.S. Labor Department Advances Final Rule for Cryptocurrency in 401(k) Plans

Introduction

The final regulatory framework proposed by the U.S. Department of Labor regarding the inclusion of alternative investments such as cryptocurrencies in retirement plans has now been submitted for review by the White House, signaling a significant shift in how employers might offer exposure to digital assets via 401(k) accounts. This initiative, titled "Fiduciary Duties In Selecting Designated Investment Alternatives," is identified as rule 1210-AC38 and is classified as economically significant by the Office of Information and Regulatory Affairs.

Submission Details

This submission came to the White House on November 5, and although there is no legal deadline for the review, it follows an earlier proposal issued on March 30, which outlined how retirement plan managers could assess investment options, encompassing private equity, real estate, and digital assets. The Labor Department noted that while managers of defined contribution plans already have the authority to consider such alternative assets, they had been reluctant to do so in practice.

Proposed Framework

The proposed framework sets forth a structured process for managers to determine which investments could be included in a retirement plan's offerings. Notably, this process aligns with the fiduciary duty of prudence established under the Employee Retirement Income Security Act (ERISA), which regulates private-sector retirement programs. The Labor Department has emphasized that their stance is impartial toward various asset types, as highlighted by Deputy Labor Secretary Keith Sonderling, who stated that the proposal avoids favoring any asset class over others.

Investment Considerations

The framework not only delineates investment alternatives but also suggests that adhering to the outlined process would inherently provide a presumption of prudence in decisions made by fiduciaries. This means that considerations for various asset classes, including cryptocurrencies, would be evaluated against criteria such as performance, fees, liquidity, valuation, benchmarks, and inherent complexity.

Crypto.news previously reported that the initial proposal successfully cleared White House scrutiny back on March 24. The current submission pertains to the final-rule stage, following its prior publication in the Federal Register and the public comment period that closed on June 1.

Key Factors for Fiduciaries

Fiduciaries are expected to consider several key factors:

• Performance: They should benchmark returns against similar investments while taking into account risk and investment duration.
• Costs: The assessment of costs does not mandate that the least expensive option be chosen, but higher fees must be justified by corresponding expected returns or advantages.
• Liquidity: Evaluated to ensure investments meet needs arising from withdrawals, job transitions, or financial hardships, among other scenarios.
• Benchmarks: Proposed guidelines introduce benchmarks for assessing investments lacking clear market valuations, necessitating a focus on their alignment with the investment's strategy and risk profile.

Potential Impact

In a related commentary, Sweep on November 6 suggested that redirecting just 2% of the total assets in American 401(k) plans into cryptocurrencies could yield approximately $216 billion in new investments. This figure is derived from the Investment Company Institute's report, which placed total 401(k) assets at $10.8 trillion as of June 30, 2023. Notably, the 2% allocation reflects an assumption applicable to the entire asset pool without a specified timeframe or commitments from employers or plan administrators.