Report Highlights Risks and Oversight Challenges of Crypto in 401(k)s

A recent Government Accountability Office (GAO) report raises concerns about including cryptocurrency in 401(k) plans. While crypto investments remain a small portion of retirement portfolios, their extreme volatility and lack of oversight pose significant challenges for plan sponsors.

Key Risks of Cryptocurrency in 401(k)s

• High Volatility: A GAO simulation found that a 20% allocation to bitcoin led to significantly greater portfolio swings than smaller allocations of 1% or 5%.
• Limited Oversight: The Department of Labor (DOL) lacks tools to track crypto investments in 401(k)s, especially within self-directed brokerage windows.
• Regulatory Uncertainty: Reporting gaps and evolving laws make it difficult for plan sponsors to assess compliance and risks.
• Cybersecurity Threats: Crypto investments are vulnerable to hacking and theft, adding another layer of risk.

Fiduciary Responsibility for Plan Sponsors

The DOL has advised plan sponsors to act with "extreme care" when considering crypto investments. Despite recent market highs, employers must ensure investment options align with their duty to act in participants' best interests. Key concerns include:

• The lack of standardized return projections,
• Increased risk of loss due to price swings,
• Security concerns surrounding digital assets.

What Plan Sponsors Should Consider

For those exploring or already offering crypto options in 401(k) plans, the GAO suggests:

• Reviewing fiduciary obligations: Ensure all investment options meet prudence standards and evaluate risks regularly.
• Monitoring regulatory updates: Stay informed on evolving federal oversight and reporting rules.
• Educating participants: Provide clear information on crypto risks and volatility.
• Limiting exposure: Consider capping crypto investments at a small percentage of portfolios.
• Consulting legal counsel: Ensure compliance with ERISA guidelines and other federal regulations.

A Call for Greater Oversight

Massachusetts Congressman Richard Neal, a leading voice on retirement policy, has called for stronger federal oversight to protect workers' retirement savings. He emphasized that the GAO report shows the need for more safeguards against crypto’s high-risk nature.

By taking a cautious and informed approach, plan sponsors can help protect participants while navigating the challenges of this evolving investment landscape.