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Publications | March 16, 2022
4 minute read

The DOL Takes on Digital Assets and Brokerage Windows

The red-hot market in digital currencies, non-fungible tokens (NFTs) and other digital assets has had 401(k) plan fiduciaries asking whether it is time to open their investment options to these kinds of assets. In its Compliance Assistance Release 2022-01 (“Release”), the United States Department of Labor (DOL) has answered this question with a resounding “No!” Without banning outright the offering of digital asset options, the DOL identified serious obstacles to ERISA fiduciaries’ ability to satisfy their duties of prudence and loyalty in including these options. Moreover, the DOL announced it will investigate plans that offer them and will “take appropriate action to protect the interests of plan participants and beneficiaries.”

Duties of Prudence and Loyalty

The DOL reiterated the obligations of a fiduciary to ensure the prudence of all investment options on an ongoing basis. Reflecting the recent Supreme Court decision in Hughes v. Northwestern University, 142 S. Ct. 737 (2022), the DOL noted: “Fiduciaries may not shift responsibility to plan participants to identify and avoid imprudent investment options.” It is the fiduciary’s job to evaluate the prudence of each option.

Challenges of Digital Assets

The DOL pointed out several aspects of digital investments that would make them an imprudent choice for retirement plan investment options, including:

  • Extreme price volatility, which can be particularly devastating for participants who are approaching retirement.
  • A high level of difficulty for participants, or even experts, to understand and evaluate, especially in light of pervasive hype.
  • The reliance of participants on fiduciaries to select prudent options.
  • Custodian and recordkeeping issues, including the difficulties of valuation and the availability of funds when needed to pay benefits and expenses.
  • The risk of loss of access to digital assets, whether due to something as simple as losing or forgetting a password to a digital wallet or due to law enforcement shutting down or limiting the use of platforms on account of illegal activities (given the increasing use of cryptocurrencies for drug dealing, money laundering, ransomware, etc.).
  • The reliability and accuracy of valuations, when no universally accepted standards yet exist.
  • The lack of a stable regulatory framework, which is only in its early stages of development.

What about brokerage windows?

Some fiduciaries have considered whether they could avoid these challenges by using a brokerage window, where participants select their own investments from a nearly unlimited world of options. Ever since the DOL backed off from requiring fiduciaries to understand and disclose fees for brokerage-window investment options under the participant fee disclosure regulations, plan fiduciaries have offered brokerage windows on the assumption that they have no fiduciary obligation with respect to the innumerable options available. They have assumed that their fiduciary duties of prudence and loyalty apply only to the designated investment alternatives they have selected and the available brokerage window platform, but not the brokerage window investment options.

Until this Release, the DOL has not challenged this assumption or provided any guidance about a fiduciary’s responsibility for brokerage window options, despite the proliferation of brokerage windows. In the Release, however, the DOL stated that plan fiduciaries “allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks described above.” This is the first statement from the DOL indicating that fiduciaries have duties of prudence and loyalty for investment options offered through a window. When combined with the DOL’s characterization of the Supreme Court’s opinion in the Northwestern case that fiduciaries cannot shift responsibility for sifting through options to participants, the extent of a fiduciary’s responsibility for investments available through a brokerage window is in question.

Take Aways

Plan fiduciaries should avoid offering digital asset investments until a more stable market and regulatory environment are established. Even if the DOL does not investigate, fiduciary liability insurers are likely to take note. Fiduciaries may also want to discuss with legal counsel the extent of their fiduciary responsibilities with respect to investment options available through a brokerage window.

The attorneys in our Employee Benefits/Executive Compensation Practice Group are here to help plan fiduciaries. Contact your Warner attorney or Mary Jo Larson at mlarson@wnj.com or at 313.546.6183 with questions.