US Department of Labor says crypto in retirement plans will attract legal attention

The level of cryptocurrency adoption in the United States has grown to record highs over the past year. Institutional adoption has also skyrocketed, and this has created worry among federal agencies that retirement funds could be at risk due to the high volatility of the cryptocurrency market.

The US Department of Labor has urged investors to be cautious when using cryptocurrencies. The agency stated that cryptocurrencies and other digital assets were exposed to risks such as theft, fraud and financial loss.

Department of Labor warns against crypto

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The agency published a compliance report on Thursday that warned employers against increasing their exposure to cryptocurrencies. The department mentioned that employers engaged in cryptocurrency assets in their 401 (k). It stated that if a company made any significant in cryptocurrencies through their retirement accounts, the action could attract legal attention.

A 401 (k) is a retirement savings plan. It is the most popular retirement fund provided by employers in the US. Those who choose to use 401 (k) as a retirement savings plan enjoy tax benefits and financial security.

401 (k) investments are usually guided by legislation. They are regulated under the Employee Retirement Income Security Act of 1974 (ERISA). The act does not mention the specific asset classes that the fund can invest in.

However, the act calls for the managers of this fund to exercise caution when making their investments. It mentions that they should exercise “care, skill, prudence and diligence” like any prudent person. Exercising caution ensures that the fund has a lowered risk of making massive losses.

Cryptocurrencies are known to be highly volatile. Digital assets are still a new asset class, and their price movements can fluctuate unexpectedly and by large margins. Therefore, due to this volatility, these assets have yet to create a position for themselves as worthy investments for the 401 (k) retirement savings plan.

The DOL concerns are founded by the increased number of financial service providers that want to advertise crypto as an investment option for 401 (k) fixed retirement accounts. One of these is ForUsAll Inc, which partnered with the Coinbase exchange in June 2021. 

Cryptocurrencies are volatile

The department released a blog post that addressed the volatile nature of cryptocurrencies. In this blog post, the assistant secretary at the Employee Benefits Security Administration (EBSA), Ali Khawar, noted that caution was needed to protect retirement savings from risky investments.

Khawar said,

At this early stage in the history of cryptocurrencies, however, the [DOL] has serious concerns about plans’ decisions to expose participants to direct investments in cryptocurrencies or related products, such as NFTs, coins and crypto assets.

Volatility is not the only thing making cryptocurrencies risky. Digital assets remain highly unregulated. This exposes investors to the possibility of fraud that could lead to major losses.

This week, the US President, Joe Biden, signed an executive order on digital assets. The order urged federal agencies to work on ways to regulate the crypto sector. This could lead to the development of a comprehensive crypto regulatory framework and streamline the sector.