Labor Dept. Warns Fiduciaries About Offering Crypto in DC Plans

The Employee Benefits Security Administration said 401(k) fiduciaries should use ‘extreme care’ before adding crypto options to a plan.



The U.S. Department of Labor’s Employee Benefits Security Administration has issued a guidance warning to defined contribution plan fiduciaries to “exercise extreme care” before they consider adding a cryptocurrency option to their 401(k) plan’s investment menu.

The department said that it has “serious concerns” about fiduciaries that expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies. The EBSA said the investments present “significant risks” and challenges to retirement plan accounts, including risks of fraud, theft, and loss.

The agency said it was compelled to issue the warning after becoming aware in recent months that companies were marketing investments in cryptocurrencies to 401(k) plans as potential investment options. The EBSA’s warning also applies to a wide range of digital assets, including those marketed as “tokens,” “coins,” and “crypto assets.”

As investing in digital assets becomes more mainstream, the concept of including crypto in retirement plans has been gaining some traction. In June, ForUsAll, a financial consultant that focuses on small businesses, launched its Alt 401(k) retirement investment platform, which allows employers to provide alternative investment options within their retirement plans. As the plan’s first alternative investment, ForUsAll provided employers the option to offer cryptocurrency investments. And according to a survey released by fintech company Capitalize, 56% of Gen Zers and 54% of Millennials include crypto investments in their retirement strategy.

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EBSA noted that under the Employee Retirement Income Security Act of 1974, fiduciaries “must act solely in the financial interests of plan participants and adhere to an exacting standard of professional care.” It cautioned that fiduciaries who breach those duties are personally liable for any losses to the plan that are a result of the breach.

“A fiduciary’s consideration of whether to include an option for participants to invest in cryptocurrencies is subject to these exacting responsibilities,” EBSA said. “Fiduciaries may not shift responsibility to plan participants to identify and avoid imprudent investment options.”

The agency cited a recent Supreme Court ruling in the case of Hughes v. Northwestern University that said that “even in a defined-contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.”

Five main reasons were provided by the Labor Department as to why investments in cryptocurrencies present significant risks and challenges to retirement plans:

  • Speculative and Volatile Investments. Cryptocurrencies have been subject to extreme price volatility, which may be due to uncertainties associated with valuing the assets, speculative conduct, the amount of fictitious trading reported, and incidents of theft and fraud, among other factors.
  • The Challenge to Informed Decisions:  When plan fiduciaries choose to include a cryptocurrency option on a 401(k) plan’s menu, they effectively tell the plan’s participants that knowledgeable investment experts have approved the option as a prudent one. “This can easily lead plan participants astray and cause losses,” said the EBSA.
  • Custodial and Recordkeeping Concerns: Cryptocurrencies are not held like traditional plan assets in trust or custodial accounts, readily valued and available to pay benefits and plan expenses. Instead, they generally exist as lines of computer code in a digital wallet, which means losing or forgetting a password can result in the loss of assets forever.
  • Valuation Concerns: The department said it is concerned about the reliability and accuracy of cryptocurrency valuations. It noted that experts have fundamental disagreements about key aspects of the cryptocurrency market, adding that none of the proposed models for valuing cryptocurrencies are as sound or academically defensible as traditional discounted cash flow analysis for equities or interest and credit models for debt.
  • Evolving Regulatory Environment: Some market participants may be operating outside of existing regulatory frameworks or not complying with them. Fiduciaries who are considering including cryptocurrency investment options will have to include in their analysis how regulatory requirements may apply to issuance, investments, trading, or other activities and how those regulatory requirements might affect 401(k) plans.

The EBSA said that it expects to conduct an investigative program aimed at retirement plans that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to the investments.

“The plan fiduciaries responsible for overseeing such investment options or 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,” said the EBSA.

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The First Quarter Was Bad for Asset Managers’ Stock, Even Though Their Fourth Quarter Earnings Ruled

Amid the market carnage of early 2022, the long-term outlook is good for the money mavens.



Asset managers have fared very well on the top and bottom lines. And over the past five years, their stocks have generally romped. But the stock market’s epic 2022 downdraft has pulled those shares down with a vengeance, along with those of other sectors.

Odds are, though, that their stocks should recover, especially in light of escalating interest rates, which tend to be a friend to the financial services industry. The benchmark 10-year Treasury’s yield has leapt to 2.3% from 1.7% the year before and1.5% at the end of last year.

The top publicly traded asset managers, by assets under management, is headed by colossus BlackRock. The other names in the roster, in order, are JPMorgan Chase, Goldman Sachs, Bank of New York Mellon, and Morgan Stanley.

Prospects of Rising Rates Boosts Managers’ Stock (Until the Recent Market Rout)

* As of March 30, 2022. Sources: S&P Dow Jones Indices, Yahoo Finance


Marketwide, the prospects for continued blowout earnings have dimmed, according to FactSet, although expansion is anticipated to stay fairly decent. In last year’s fourth quarter, S&P 500 companies reported growth in earnings of 31.2% and in revenue of 16.1%. For 2022’s first quarter, analysts are projecting smaller increases: 4.8% for earnings and 10.7% for revenue.

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Things, however, are looking up for asset managers. Take BlackRock, which boasts $10 trillion in AUM. In the fourth quarter, the company reported adjusted earnings per share of $10.42, beating the $10.15 average estimate of analysts surveyed by Bloomberg. The just-completed first quarter looks even better. The consensus is for EPS of $9.18 (winter is usually the slowest period), versus $7.77 for the prior year quarter.

In January, BlackRock hiked its dividend 18%. The firm has a fortress-like balance sheet, and its interest rate coverage is superb.

Small wonder. Institutional investors and smaller ones too poured into the company’s products after the initial pandemic surge. BlackRock’s range is impressive. Its index funds—most notably its iShares exchange-traded funds—are doing a booming business, and it has a thriving private equity arm, as well. BlackRock has expanded internationally, from Latin America to Europe.

Thus far in 2022, though, BlackRock stock is down a bracing 16.5%. That stands in marked contrast to its returns over the past five years, when the stock doubled. The situations are much the same at the other top publicly traded finance firms. Morgan Stanley, for instance, also saw its stock double over the past half-decade, and this year is off 13%.

For investors, an abiding advantage to financial stocks is that they are perennially cheap, as they are in a mature industry whose advances tend to be slow and steady. BlackRock’s price/earnings ratio is 20, while Morgan Stanley’s is 11.

One consolation: the finance sector is No. 3 among the S&P 500 during this market dip, according to Yardeni Research. Sure, it is in the red, but that’s a plus when everyone else is, too (exceptions: No. 1 energy, followed by utilities).

BlackRock CEO Larry Fink, in his annual letter to shareholders, noted that the company’s stock hasn’t been doing anything special, to say the least. And that’s quite a comedown from the firm’s bang-up 2021, he noted. “Since year end, however, market sentiment has shifted and these first few months of 2022 have been challenging,” he wrote. But, Fink went on, there will be a big turnaround.

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