The first legal challenge to the Department of Labor’s controversial cryptocurrency in retirement plans guidance released in March is upon us, by way of California-based 401k provider ForUsAll filing suit against the DOL and Labor Secretary Marty Walsh in the U.S. District Court in Washington, D.C., last Thursday.
The suit alleges the agency violated the Administrative Procedure Act (APA) by issuing guidance (Compliance Assistance Release 2022-01, “401(k) Plan Investments in ‘Cryptocurrencies”) without following the correct procedures. It challenges “DOL’s arbitrary and capricious attempt to restrict the use of cryptocurrency in defined contribution retirement plans, in excess of its authority under the Employee Retirement Income Security Act (“ERISA”), and without following the notice and comment process required under the APA,” according to the complaint.
But there’s much more to it than seeking to vacate the guidance because of improper procedures. ForUsAll CEO Jeff Schulte told 401k Specialist Monday the suit was brought because the Department of Labor is suddenly trying to restrict the types of investments Americans get to make, even though it has no authority to do so. “The Department of Labor is trying to ban an asset class, and that’s simply outside their purview. They’re not supposed to pick winners and losers; they’re not supposed to try to ban an asset class,” Schulte said.
“This is an extremely troubling precedent. And if it’s left unchecked, we think this makes for a very slippery slope. Today they’re trying to ban cryptocurrency—who knows where this goes tomorrow?”
Schulte pointed to an April 12 letter sent by a group of 10 large industry trade groups to Acting Assistant Secretary Ali Khawar which asked that the compliance assistance release be withdrawn and that the Department instead develop guidance in this area through notice-and-comment rulemaking.
He noted the letter made it clear that while the groups express no view on the appropriateness of retirement plan investments in cryptocurrency, they were very troubled by what the Department of Labor was doing with—among other things—the guidance in bypassing the notice-and-comment process.
The DOL did not withdraw the guidance.
“There is a process for changing the rules. That’s the Administrative Procedures Act. They clearly haven’t followed that,” Schulte said. “At this point we feel we have no choice left but to pursue some relief through the courts. And that’s why we filed a complaint last week,” Schulte said.
Additional concerns
The industry trade groups also expressed concern about the practical consequences of the guidance for plan sponsors.
CAR No. 2022-01 instructed employers to use “extreme care” when considering cryptocurrency investments and warned of a looming “investigative program” for crypto-invested plans. Even employers that let their workers choose digital assets could undergo heightened regulatory scrutiny, the guidance said.
“The DOL has clearly said that they are staffing investigatory programs and that anybody—any small business—that decides they want to add cryptocurrency should expect to be questioned,” Schulte said.
As the letter points out, this is not the legal standard applicable to fiduciaries under ERISA, and CAR’s reference to “extreme care” creates confusion regarding the legal standard to which fiduciaries are subject.
There is also concern about the DOL deciding which investments are inherently appropriate or inappropriate. “We are not aware of any legal basis on which the Department can proceed down this path, and this would set a concerning precedent for future announcements by any Administration about what investments are permissible,” the letter states, which is also echoed in ForUsAll’s complaint.
Demand lags after guidance
After ForUsAll introduced the Alt 401(k) in June 2021, its turnkey retirement investment platform that allows employers to provide alternative investment options within 401k plans, the company received inquiries from more than 150 businesses, Chief Investment Officer David Ramirez told CoinDesk. The DOL guidance has certainly tempered interest.
“We clearly are seeing that there’s an impact on employers which is exactly what the Department of Labor was, I think, attempting to do. They were attempting to impose a ban.”
ForUsAll’s Jeff Schulte
“As we’ve said in the complaint, we’ve talked to a number of our customers, and of those that we spoke to, about one-third have said that they’re very concerned about being harassed and investigated by the Department of Labor, and have chosen to put a pause on adding cryptocurrency for the moment,” Schulte said. “So we clearly are seeing that there’s an impact on employers which is exactly what the Department of Labor was, I think, attempting to do. They were attempting to impose a ban.”
In the suit, ForUsAll claims to have suffered damages as a result of the DOL’s guidance, and asks the court to vacate and set aside the guidance, to prevent the DOL from acting to implement it, and from pursuing investigations outside its allowed scope.
Schulte said he’s unsure how quickly the case will make its way through the court.
“I’m sure that the DOL will have their opportunity to respond. We’ll just have to see,” he said. “What I can say is that this type of overreach is extremely troubling. We hope that the courts will move quickly and remove the fear, uncertainty and doubt that the Department of Labor is attempting to wield in their effort to impose a ban on cryptocurrency.”
SEE ALSO:
• DOL Cautions 401k Fiduciaries on Cryptocurrencies in Wake of Executive Order
• New ‘Alt 401(k)’ to Provide Retirement Plan Cryptocurrency Access
• DOL ‘Gravely Concerned’ About Fidelity 401k Bitcoin Announcement