The Department of Labor views cryptocurrency offerings in 401(k) plans as a “risk to the system” and wanted to issue guidance highlighting its concerns before such offerings became mainstream, Ali Khawar, acting head of the agency’s Employee Benefits Security Administration, said Thursday at an Insured Retirement Institute conference in Washington.
Had the Labor Department gone through a standard rule-making process — which takes at least months and potentially years — on its cryptocurrency guidance, the “regulatory landscape was not going to look the same,” Mr. Khawar said.
He was referencing the March 10 Labor Department guidance for 401(k) plan fiduciaries that told them to “exercise extreme care” before selecting cryptocurrency as an investment option in plan menus.
Fiduciaries who include such investment options or who allow such investments through self-directed brokerage accounts “should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of” potential risks associated with cryptocurrencies, the guidance said, referring to ERISA’s requirements.
Since then, Fidelity Investments made waves April 26 when it announced a program to allow up to 20% of a participant’s retirement account be invested in bitcoin.
Mr. Khawar told Pensions & Investments earlier this month that the Labor Department was told about Fidelity’s plans only one day before its announcement.
On Thursday in a huddle with reporters, Mr. Khawar said he and Labor Department staff have subsequently met with Fidelity about its cryptocurrency offering.
“They walked us through in more detail how they saw their offering working, how they viewed the protections,” Mr. Khawar said. “There was, I think, a cordial but candid exchange of views; I think they understand the concerns that we have.”
He added, “We didn’t leave that conversation feeling comfortable that all our concerns were unfounded, unwarranted, resolved with what they’ve done, but I’m sure we’ll be talking more.”
Fidelity is proud of its Digital Assets Account as a responsible solution to meet the demands of mainstream interest in digital assets, Dave Gray, head of workplace retirement offerings and platforms, said in a statement Thursday. “Several layers of consumer safeguards apply to the DAA, including the inherent protections of a workplace retirement plan, the features of the account such as excessive trading oversight and institutional security, plan sponsor imposed limits on allocations to the DAA and leading educational resources to help inform participants understand whether exposure to bitcoin is right for their risk tolerance,” Mr. Gray added. “We share the mission of (Labor) Secretary (Marty) Walsh and the DOL to protect America’s retirement system, and it is for these reasons we are excited to offer this service while remaining committed to an open-dialogue with regulators, policymakers and our customers as we do.”
Incorporating cryptocurrencies in participants’ retirement accounts present “significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss,” the March 10 guidance said. The risks exist because cryptocurrencies are speculative and volatile investments; pose custodial and record-keeping challenges; present valuation concerns; and contend with an evolving regulatory environment, the Labor Department added.
When it comes to cryptocurrency enforcement, Mr. Khawar said the issue the department is most focused on is “the same thing that motivated us to start looking at this: It’s the instances where people are somewhat aggressively being marketed cryptocurrency in the context of a 401(k) where there really is some element of pushing people into it.”
Mr. Khawar was also asked about the department’s environmental, social and governance and proxy voting proposal, which was unveiled in October and stipulates “that climate change and other ESG factors are often material and that in many instances fiduciaries … should consider climate change and other ESG factors in the assessment of investment risks and returns.”
It’s a proposal in stark contrast to two Trump administration rules, one of which stipulated that ERISA plan fiduciaries cannot invest in “non-pecuniary” vehicles that sacrifice investment returns or take on additional risk.
Mr. Khawar said Thursday that he viewed the Trump administration rules as “putting a thumb on the scale” against ESG investing. He said the current proposal aims to take the department’s metaphorical thumb off the scale entirely, and say to stakeholders that “this is the framework, this is what you need to understand about engaging in these issues and you need to make a decision. If you want to take (ESG) into account, you understand the framework. If you don’t want to, as long as you’re not subverting your fiduciary obligation, that’s fine,” Mr. Khawar said.
When asked about the timing of a final rule, he added, “We’re trying to get it out as soon as we can, but as soon as we can is not an indication of it coming out in the near future.”
He noted the varying viewpoints the department received during the proposals’ comment period — some felt the proposal went too far toward promoting ESG investing, some felt it didn’t go far enough, and others felt it was neutral.
“It’s hard because we’re trying to write rules that apply to an entire industry; at the same time we recognize that not everyone does everything the same way, which makes it tricky,” Mr. Khawar said about the ESG proposal and rule-making broadly.
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