Though 401(k) investments in crypto assets are low, they can bring 'considerable risks' — GAO

Though data shows that 401(k) investments in cryptocurrency assets are low, such assets have “uniquely high volatility,” and their returns can come with “considerable risks,” the Government Accountability Office said in a report released Dec. 4.

Rep. Richard Neal, D-Mass., who serves as the top Democrat on the House Ways and Means Committee, requested the report back in 2022 after many 401(k) providers started offering the option to invest in cryptocurrencies. That same year, the Labor Department warned plan fiduciaries to “exercise extreme care” before selecting crypto as an investment option in plan menus.

“Today’s report shows there’s more to do to protect American workers and their retirement savings from the volatile, high-risk environment that comes with cryptocurrencies,” Neal said in a Dec. 4 news release. “The crypto market, since it began emerging as a 401(k) investment option for some retirees and investment firms in 2022, has not been fully subjected to proper oversight and regulation. As a result, as this report outlines, it has brought uniquely high risk to retirees.”

Through reviewing data sources such as the Department of Labor’s Form 5500 series and conducting stakeholder interviews, the GAO found that “investment in crypto assets and their derivatives has been minimal, relative to the overall market for 401(k) plans,” according to the report, though the agency noted there were some limitations in the Form 5500 series data.

Officials from the DOL’s Employee Benefits Security Administration also told the GAO that “401(k) plans had generally not adopted crypto asset investment options,” and “overall plan exposure to these investments had been minimal.”

The GAO identified 69 crypto asset investment options available to 401(k) plans, with most available through self-directed brokerage windows, providing indirect exposure to crypto assets.

One of the primary risks of crypto assets is “they mainly derive their value from investor sentiment rather than through tangible company assets or cash flows,” the report noted, naming another risk as the assets’ “uniquely high volatility.”

Based on an analysis of five crypto assets available for investment in 401(k) plans from 2021 to 2023, the assets’ volatility “ranged from four times to 12 times greater than the volatility of the Standard and Poor’s 500 (S&P 500),” the GAO found.

However, the GAO also calculated the five assets’ risk-adjusted returns, finding that the risk-adjusted returns for that same period “have been negative in a few years, but have been generally higher than the S&P 500.”

Notably, DOL officials told the GAO that “EBSA generally had not required fiduciaries to evaluate each investment option available to participants through self-directed brokerage windows.” Therefore, “participants assume greater risk for such options,” the report concluded.

However, the DOL’s 2022 "compliance assistance" document said fiduciaries allowing crypto through self-directed brokerage windows "should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of" crypto’s potential risks.

The report also noted that “uncertainty remains as to whether federal securities laws apply to the offer and sale of certain crypto assets,” which has been a contentious issue under SEC Chair Gary Gensler’s tenure.

Cryptocurrency industry insiders and advocates have often criticized the SEC for what they call a “regulation by enforcement approach,” given the agency’s enforcement actions filed against crypto firms and exchanges for the unregistered sale of securities.

President-elect Donald Trump announced Dec. 4 he plans to nominate former SEC commissioner Paul Atkins to lead the agency after Gensler steps down in January. Atkins, who is currently CEO of Patomak Global Partners, has been a leader in developing best practices for digital asset issuances and trading platforms as co-chair of the Token Alliance, according to his Patomak Global Partners biography.