Fiduciary Review of Digital Assets Explained
Retirement plans covered by the Employee Retirement Income Security Act of 1974 (ERISA) may soon include digital assets, but the process remains complex. President Trump’s 2020 executive order and the Department of Labor’s (DOL) proposed rule both signal support for such investments, though they emphasize indirect approaches over direct holdings. The DOL’s guidance focuses on fiduciary duties, while the Securities and Exchange Commission (SEC) has begun defining terms for digital assets, adding layers to the legal setting.
The executive order stated that retirement plans should offer access to alternative assets, including digital holdings via funds, not direct investments. This approach avoids exposing plan participants to the volatility of individual cryptocurrencies. The DOL’s proposed rule introduces a “safe harbor” for fiduciaries evaluating digital investment alternatives (DIAs), but it stops short of addressing direct investments through brokerage windows in 401(k) plans. The rule’s six evaluation factors—performance, fees, liquidity, valuation, benchmarks, and complexity—apply broadly, though they require advisers to explain how these metrics work for digital assets. Notably, the DOL emphasized that the rule is “investment neutral,” meaning it applies to all designated investment alternatives, whether they involve alternative assets or not.
Despite the DOL’s efforts, the absence of explicit guidance on direct investments creates uncertainty. Brokerage windows, which allow participants to trade cryptocurrencies directly, remain outside the proposed rule’s scope. Fiduciaries still face ERISA obligations for such options, but without clear directives, adoption may lag. The SEC’s March 2023 interpretation, co-authored with the Commodity Futures Trading Commission, labels certain digital assets as securities and defines categories like digital commodities and stablecoins. This terminology helps advisers handle the space but does not resolve how ERISA applies to direct holdings.
Related: Wealth Managers Expect Alts Interest to Accelerate
Plan fiduciaries increasingly rely on advisers with dual expertise in investment strategy and technology. Understanding blockchain mechanics, valuation differences in crypto markets, and liquidity challenges is essential for assessing DIAs. Advisers must also guide fiduciaries through ERISA’s prudence standard, which demands careful analysis of risks. Without this, fiduciaries could face litigation over mishandled digital assets, despite the DOL’s safe harbor for indirect investments. The DOL explicitly noted that fiduciaries should engage appropriately qualified advisers when evaluating DIAs, particularly if they lack in-house expertise in digital asset valuation or the technological underpinnings of blockchain networks.
The DOL’s proposed rule did not speak to fiduciary review of direct or indirect investment in digital assets, by way of example or otherwise. Further, the DOL did not take an opportunity to further open the door to direct investment in digital assets through brokerage windows or similar features in 401(k) plans. The proposed rule stated that the brokerage window and the investments available through the window are not DIAs and thus not subject to the fiduciary analysis described therein. The DOL also did not go so far as to say that a plan fiduciary has no ERISA fiduciary responsibility regarding investments available through the window. Thus, while the brokerage window is the most efficient way to introduce direct investment in digital assets in the near term, and some plans already avail themselves of this option, additional clarification by the DOL is needed to promote broader adoption. Hopefully, the DOL will further address these and other issues related to digital assets in the final regulation or other guidance.
