Trump Push to Add Crypto to 401(k)s Brings Risks for Employers

Litigation risk for employers regarding their employees’ 401(k) investments poses a significant challenge to President Donald Trump’s initiative to integrate cryptocurrency into retirement accounts. The U.S. Labor Department is currently reversing guidance from the Biden administration that cautioned against including digital currencies in workplace retirement plans. This shift represents a broader effort by the White House to expand 401(k) options to incorporate alternative assets like private equity, following movements led by Trump-affiliated businesses doubling down on Bitcoin and other cryptocurrencies.

Currently, cryptocurrencies account for less than 1% of the $9 trillion 401(k) market, which has traditionally been dominated by stocks and bonds. Even with the rescission of Biden-era guidance, it is unlikely that this percentage will increase dramatically. Employees, not only the government, can take legal action against their employers for offering investments considered imprudent. Lisa M. Gomez, who previously oversaw the Department of Labor’s Employee Benefits Security Administration, expressed concerns regarding the volatility surrounding cryptocurrencies. “There is still way too much uncertainty in the cryptocurrency market for plan fiduciaries to jump into this head first,” she stated.

Financial firms may find the revised guidance somewhat helpful in developing 401(k) products that cater to self-directed brokerage windows or innovations linked to crypto-centric tech ventures. However, benefits industry experts largely agree that the overall menu of investment options will remain unchanged. “Employees and participants weren’t necessarily requesting crypto assets to be included in plan investment menus,” noted Colleen Lamarre, a partner at Pillsbury Winthrop Shaw Pittman LLP.

The shifting regulatory landscape brings various fiduciary dangers. Critics of digital currencies point out their volatile and illiquid nature, which lacks transparency and oversight—factors that could lead to increased litigation risks for employers. The Securities and Exchange Commission (SEC) has dismissed multiple cases against crypto firms since the beginning of the Biden administration, signaling a relaxed regulatory approach. Moreover, Trump recently signed legislation blocking an IRS rule that would require platforms to disclose tax information on crypto trades.

Bitcoin itself achieved an all-time high earlier this month, surpassing the $100,000 mark, continuing a trend initiated during the last significant surge in value in 2021. However, the subsequent “crypto winter” saw a notable decline in consumer interest in digital assets for retirement plans. Experts like Keith Huber, Vice President of OneDigital, remark that the few employees pushing for Bitcoin 401(k)s are likely engaging in “performance chasing,” which is generally discouraged among plan sponsors.

Retirement plan decision-makers are required to adhere to a stringent fiduciary standard under the Employee Retirement Income Security Act (ERISA), mandating them to select and monitor prudent investments that serve the best interests of the plan participants. Given the unpredictable nature of cryptocurrencies, employers could face allegations of fiduciary violations should they make digital assets more accessible to employees. This concern grows particularly acute considering the increasing number of private-sector class actions related to alleged excessive fees and insufficient monitoring of third-party providers.

The mere act of the Department of Labor’s guidance revision does not offer a safety net against liability for breaching fiduciary duties. “Employers would be wise to continue exercising the ‘extreme care’ that characterized Biden’s guidance,” advised Stephen Hall, a legal director and securities specialist with the consumer group Better Markets.

Despite the potential legal hazards, the revised guidance could foster new opportunities for crypto firms within the lucrative 401(k) marketplace, particularly concerning plans that permit brokerage windows. While rare, some investors have accessed cryptocurrencies through these windows as a means to engage with the broader financial market. Pioneering recordkeepers like ForUsAll Inc. and Fidelity Investments have developed products facilitating crypto trading in these contexts.

Katherine Dowling, General Counsel and Chief Compliance Officer at Bitwise Asset Management, stated that fiduciaries now have the liberty to explore crypto options, “free from repercussions,” allowing them to weigh the diversification benefits of these products. The earlier Biden-era guidance effectively limited crypto investments by threatening investigations into plan sponsors, creating an environment of apprehension around incorporating digital assets.

Another avenue for potential growth lies with public companies investing heavily in cryptocurrency. These firms could allow investors to acquire equity closely aligned with digital currency holdings. The Trump administration’s elimination of Biden’s crypto guidance coincided with a recent stock sale by the company behind Truth Social, aimed at raising capital to establish its own Bitcoin treasury.

The landscape remains dynamic, and while it is premature to determine the full implications of these changes, companies constructing digital asset treasuries could represent the most straightforward way for institutional 401(k) investors to engage with cryptocurrencies. According to industry insiders like Daniel Burdofsky, a partner at Pillsbury, there exists significant potential for a new wave of institutional crypto investment strategies.

OneDigital’s Huber suggests an optimistic outlook: “We have an incredibly pro-crypto administration,” he said, advising clients to build diversified portfolios that incorporate target date funds and managed accounts. He emphasized the necessity for staying abreast of rapid developments in the field.

As the potential for cryptocurrencies within retirement accounts evolves, employers must navigate the legal complexities and market uncertainties intricately tied to these digital assets. An informed approach may help to safeguard against litigation risks while exploring new investment avenues for employees. The dialogue around integrating cryptocurrencies into 401(k) plans will continue to unfold, presenting both challenges and opportunities for stakeholders in the benefits industry.

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