Vice President, Retirement Policy, U.S. Chamber of Commerce
April 13, 2022
Via Electronic Delivery
Mr. Ali Khawar
Acting Assistant Secretary
Employee Benefits Security Administration
200 Constitution Ave NW, Suite N-5677, Washington, DC 20210
RE: Compliance Assistance Release No. 2022-01 401(k) Plan Investments in “Cryptocurrencies”
Dear Acting Assistant Secretary Khawar:
The U.S. Chamber of Commerce (Chamber) is concerned with Compliance Assistance Release No. 2022-01 401(k) Plan Investments in “Cryptocurrencies” (Release No. 2022-01), which affects plan sponsors by attempting to regulate through investigation, effectively prohibiting certain investments through investigations, and mandating fiduciary responsibility for brokerage window investments. If regulation is needed in this area, it should be done through formal rule making under the Administrative Procedures Act (APA) rather than through investigations. As such, we request that Release No. 2022-01 be rescinded.
Regulating through Investigating
The Employee Benefits Security Administration (EBSA) issued Release No. 2022-01 on March 10, 2022, without any notice or comment to or from the public through the Administrative Procedures Act. EBSA does not define the scope of or force and effect of a “Compliance Assistance Release.” The only other time EBSA issued a “Compliance Assistance Release” it was directed at EBSA regional directors, and it specifically included a statement that “The contents of this document do not have the force and effect of law, and are not meant to bind the public in any way.”1
On the other hand, it appears that Release No. 2022-01 will have a direct impact on plan sponsors. In Release No. 2022-01, EBSA states that it “has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies. These investments present significant risk and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss…” EBSA then explains its views on these risks.
EBSA ends Release No. 2022-01 by warning that:
Through these investigations, EBSA would enforce its views in Release 2022-01, but the standards in that document have not been subject to notice and comments. Because it has not been subject to notice and comment, it also is unclear what exactly EBSA is investigating. EBSA states it “expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products….” (Emphasis added). Does this mean that EBSA only expects to look at standalone cryptocurrency, such as allowing participants to invest in Bitcoin directly, at mutual funds or exchange traded funds (ETF) that invest in cryptocurrency or invest in companies involved in cryptocurrency, or in mutual funds, ETF or other investment vehicle that happens to have one or two cryptocurrency related investments? Plan fiduciaries are also concerned that these investigations could result in their being in a position where they are required to make a change that results in a forced sale of an investment that a participant made.
Like any other subject matter, if regulation is needed in this area, it should be done through the APA not through investigations.
Prohibiting Cryptocurrency Investing through Investigations
ERISA does not require or forbid specific investment options, and when Congress considered requiring plans to offer at least one index fund, the proposal failed. See H.R. 3185, 110th Cong. (2007). DOL expressed “concern” that “[r]equiring specific investment options would limit the ability of employers and workers together to design plans that best serve their mutual needs in a changing marketplace.”2
As stated in other comments3, the Chamber’s view is that any regulation of fiduciary investment decisions should be neutral with respect to the type of investment and instead focus on a prudent process. By singling out cryptocurrency for investigation and stating that fiduciaries must be prepared to “square their actions” of permitting cryptocurrency investments with their duties of prudence, EBSA is at best putting a chilling effect on such investments and at worst condemning them.
Requiring Fiduciaries to Monitor All Brokerage Window Investments
ERISA and the underlying regulations do not define a “brokerage window” or a “self-directed brokerage window.” A brokerage window investment option in a participant-directed 401(k) plan is an option that gives participants and beneficiaries the capabilities to buy and sell investment securities through a brokerage platform beyond those designated by the plan.4 Brokerage windows contain hundreds, if not thousands, of different investment option. Depending on the brokerage window, a plan fiduciary often is not allowed to limit the available investments. Furthermore, if allowed, with the potential for a new ETF, mutual fund or security to be issued and included in a brokerage window any given day, it would be nearly impossible for a fiduciary to effectively implement restrictions without significant ongoing monitoring.
The ERISA Advisory Council recently recognized that brokerage windows are helpful for plans to accommodate participants with specialized investment needs. The Council found that brokerage window users are primarily a small percentage of participants with characteristics indicating higher levels of investment experience and financial sophistication, such as longer employment tenure, higher salaries, and above average account balances.5
Nothing in ERISA or the regulations require ERISA fiduciaries to directly monitor each underlying investment option in a brokerage window. In the past, EBSA attempted to require plan fiduciaries to monitor the investments offered through brokerage windows.6 This attempt was widely criticized because it is impossible for a plan fiduciary to monitor every investment option in the window and requiring such, effectively would preclude offering a brokerage window. As such, EBSA rescinded it interpretation.
EBSA’s warning that plan fiduciaries that “allow” cryptocurrency in brokerage windows will need to square that with their duty of prudence not only is contrary to how brokerage windows have been treated in the past, but likely impossible to defend.
As noted above, in 2012, DOL attempted to required plan fiduciaries to monitor the usage of all of the investments in a brokerage window, and, if a certain percentage of employees invested in a particular investment, the disclosures provisions of 29 C.F.R. § 2550.404a-5 would apply. Because of the concern of the administrative burden of monitoring and tracking the investment options in brokerage windows, EBSA withdrew that FAQ. The same concerns are present in Release 2020-01. It would not be possible for fiduciaries to monitor whether there are stand- alone cryptocurrency investments or integrated cryptocurrency investments in a brokerage account. It also would be impossible for a plan fiduciary to monitor thousands of mutual funds to determine if there were a cryptocurrency or cryptocurrency related investment as part of the mutual fund.7 Furthermore, even were it possible to monitor whether a stand-alone cryptocurrency or cryptocurrency-related investment is available, a plan fiduciary may not be able to limit what is available in the window. Finally, as noted above, the removal of such an investment may also force a fiduciary to sale an investment that a participant made.
While we appreciate the EBSA’s concern with the evolving area of cryptocurrency, regulating through investigation is not the way to address this concern. Instead, the DOL should seek the input of the regulated community by first issuing a Request for Information to gather more facts on the issue and possible solutions. We look forward to working with EBSA in this area more effectively.
Vice President, Retirement Policy US Chamber of Commerce
Cc: Timothy Hauser, Deputy Assistant Secretary for Program Operations, Employee Benefits Security Administration