ForUsAll Inc., a 401(k) plan administrator that offers cryptocurrency to participants through a self-directed brokerage window, filed a lawsuit Thursday in District Court against the Department of Labor seeking to vacate the agency's recent cryptocurrency guidance.
In March, the Labor Department issued guidance for 401(k) plan fiduciaries telling them to "exercise extreme care" before selecting cryptocurrency as an investment option in plan menus. Fiduciaries who include such investment options or who allow such investments through self-directed brokerage accounts "should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of" potential risks associated with cryptocurrencies, the guidance said referring to ERISA's requirements.
In its lawsuit, filed in U.S. District Court in Washington, ForUsAll alleged that the guidance is "arbitrary and capricious" and violated the Administrative Procedures Act.
"Defined contribution plans governed by ERISA hold approximately $10 trillion in assets — and where those assets may be invested should not be subject to the arbitrary whims of an agency that has no such authority," the lawsuit said.
ForUsAll took issue with several aspects of the guidance, including the Labor Department's use of "extreme care," which the lawsuit said was "heretofore unseen in the nearly 50-year history of ERISA," and its focus "exclusively on the risks of cryptocurrency, without mention of its potential benefits, including diversification."
Incorporating the assets in participants' retirement accounts presents "significant risks and challenges to participants' retirement accounts, including significant risks of fraud, theft, and loss," the Labor Department guidance said. The risks exist because cryptocurrencies are speculative and volatile investments; pose custodial and record-keeping challenges; present valuation concerns; and contend with an evolving regulatory environment, the department added.
Since the guidance was issued, Fidelity Investments on April 26 announced a program to allow up to 20% of a participant's retirement account be invested in bitcoin.
Ali Khawar, acting head of the agency's Employee Benefits Security Administration, has said cryptocurrency offerings in 401(k) plans are a "risk to the system" and the department wanted to issue guidance highlighting its concerns before such offerings became mainstream.
A Labor Department spokesman did not immediately respond to a request for comment.
