As we reported yesterday, Republican lawmakers have released the draft of a bill that would enable retirement plan sponsors to offer bitcoin and other cryptocurrencies in 401k plans, along with other alternative asset classes.
The Retirement Savings Modernization Act from U.S. Senators Pat Toomey (R-PA) and Tim Scott (R-SC) and U.S. Representative Peter Meijer (R-MI) would remove liability for a breach of fiduciary duty for offering access to bitcoin and cryptocurrencies by amending the Employee Retirement Income Security Act of 1974 (ERISA) to clarify that private sector retirement plan sponsors may offer plans, including both pensions and 401ks, that are prudently diversified across the full range of asset classes.
While most observers believe the new bill faces a steep uphill battle, the objectives behind it warrant a closer look, given the debate that’s been raging throughout 2022 about whether a volatile asset class like cryptocurrency has a rightful place in a retirement plan.
Current law does not explicitly prevent cryptocurrencies from being offered in 401k plans, but the significant risk of lawsuits has largely dissuaded plan sponsor from adding them.
Earlier this year, the Department of Labor issued guidance to 401k plan sponsors urging they “exercise extreme care” before adding cryptocurrency options to their retirement plans. The department said it “has serious concerns about the prudence of a fiduciary’s decision to expose a 401k plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies.”
This didn’t stop Fidelity Investments from announcing the very next month that it would indeed allow bitcoin in 401k plans by launching Fidelity’s workplace Digital Assets Account, which drew an almost immediate response from the DOL.
“We have grave concerns with what Fidelity has done,” Ali Khawar, acting assistant secretary of the EBSA, told The Wall Street Journal soon after the news broke.
The Fidelity announcement also furrowed the brows of concerned lawmakers including Sens. Elizabeth Warren (D-MA) and Tina Smith (D-MN), who in early May penned a letter to Fidelity CEO Abigail Johnson demanding answers about the bitcoin-in 401k plan.
U.S. Senate Majority Whip Dick Durbin (D-IL) joined Warren and Smith in sending another letter to Johnson on July 26 asking “why Fidelity, a trusted name in the retirement industry, would allow plan sponsors the ability to offer plan participants exposure to Bitcoin.”
In response, Fidelity told 401k Specialist at the time it was working directly with policymakers and regulators in an ongoing dialogue, but that its plans to launch its new Digital Assets Account this fall remained on track.
In early June, ForUsAll, a San Francisco-based 401k recordkeeper claiming to be the first 401k platform to provide employees access to cryptocurrency, filed a lawsuit against the DOL, claiming the department breached its statutory purview by instituting a policy shift without undergoing the required notice-and-comment process.
“This is an extremely troubling precedent. And if it’s left unchecked, we think this makes for a very slippery slope,” ForUsAll CEO Jeff Schulte told 401k Specialist at the time. “Today they’re trying to ban cryptocurrency—who knows where this goes tomorrow?”
On Sept. 12, the DOL asked a federal judge to toss the lawsuit challenging its 401k cryptocurrency investing guidance, saying the March memo it is based on isn’t necessarily final and that ForUsAll lacks standing to sue. No further action has been announced in the case.
Sponsors say bill has broad support
Backers of the new bill say the Retirement Savings Modernization Act has broad industry support, although not from at least one key industry association. Late Thursday, the Senate Banking Committee issued a press release including statements of support from the Chartered Financial Analyst (CFA) Institute, the Small Business Investor Alliance (SBIA), the Defined Contribution Alternatives Association (DCALTA), the Institute for Portfolio Alternatives (IPA), and the American Securities Association (ASA), and the Securities Industry and Financial Markets Association (SIFMA).
The statements refrained from specifically singling out cryptocurrency and instead focused on the importance of expanding investment options permitted to be offered by plan sponsors to various asset classes that potentially offer higher, risk-adjusted returns in the alternative asset classes, including private equity.
CFA Institute noted the bill would give 401k participants access to the same asset classes that are already included and utilized extensively in all professionally managed defined benefit plans.
“It is important to note that in the context of defined contribution plans, the inclusion of alternative asset class options must be carefully scrutinized by the plan sponsor and their advisors to ensure the products and funds being offered to the plan participant are well established, professionally managed, have reasonable fee structures and are appropriately diversified,” CFA Institute’s statement said.
Notably, the bill does not currently have the support of the American Retirement Association.
“The American Retirement Association opposes any legislation that undermines ERISA’s fiduciary protections for plans and participants,” ARA CEO Brian Graff, also the Executive Director of the National Association of Plan Advisors, said in an article today on the NAPA website. “We’re concerned based on the current legislative language in this bill that it would have that effect, and we will be discussing those concerns with the bill’s sponsors.”
Road ahead unclear
Currently, the bill has no Democrat sponsors, and without any bipartisan support faces long odds of becoming law on a Capitol Hill controlled by Democrats, and even longer odds of finding its way into the larger SECURE Act 2.0 package currently being considered in the Senate.
If a Democratic sponsor can be added, or if Republicans are able to take control of either the House or the Senate during the midterm election in November, the bill’s prospects would brighten.
The SECURE Act 2.0 bill is widely expected to be taken up on the Senate floor during the upcoming lame-duck session of Congress.
SEE ALSO:
• New Bill Wants Alternative Investments in 401ks
• DOL Cautions 401k Fiduciaries on Cryptocurrencies in Wake of Executive Order
• Fidelity to Offer Bitcoin in 401ks
• DOL Sued for Attempting to Ban Crypto in 401ks