The Department of Labor’s March warning about cryptocurrency, along with Fidelity’s decision to move forward with a new “digital assets” capability for 401(k) plans, has set off a firestorm in Washington.
One of the latest developments comes from Sen. Tommy Tuberville (R-AL) who has introduced legislation to address what he describes as preserving the ability of retirement savers to invest their 401(k) funds as they see fit—including investments in cryptocurrency.
The Financial Freedom Act (S. 4147) introduced May 5 would prohibit the DOL from issuing a regulation or guidance that limits the type of investments that self-directed 401(k) account investors can choose through a brokerage window. In addition, it seeks to hold harmless 401(k) plan fiduciaries who authorize individual retirement savers to self-direct their investment choices using a brokerage window.
In announcing the legislation, Tuberville stated that “… the Biden administration has taken it upon itself to dictate what assets are viewed worthy of retirement investment, taking the decision away from individual investors by issuing regulatory guidance targeting cryptocurrency. When you’ve earned your paycheck, how you invest your money should be your decision. My legislation makes sure that is the case.”
Tuberville’s bill comes in response to guidance released March 10 by the DOL’s Employee Benefits Security Administration. That guidance in the form of a compliance assistance bulletin cautioned plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.
The senator had written to the DOL on March 29 inquiring about the DOL’s guidance, to which he received an April 30 reply from Acting Assistant Secretary of Labor Ali Khawar explaining the department’s rationale for releasing the guidance. Khawar noted, among other things, that the department’s release was prompted by recent reports of firms marketing investments in cryptocurrencies to 401(k) plans as potential investment options for plan participants.
Khawar further reiterated that cryptocurrency investments present significant risks, adding that plan fiduciaries should be able to respond to questions about their decisions to make cryptocurrency investments available to plan participants and beneficiaries, whether as designated investment alternatives or through a self-directed brokerage account or similar arrangement.
That response apparently didn’t assuage the senator, however. Tuberville, who is a member of the Senate Health, Education, Labor and Pensions Committee, contends in a May 5 CNBC op-ed that “the Labor Department’s overreaching guidance seeks to place a massive new regulatory burden on 401(k) plan fiduciaries by requiring them to assess the suitability of investments offered through a brokerage window and to restrict investment options.”
He observes that the guidance threatened that employers and investment firms could be subject to a DOL investigation and enforcement actions should they allow individuals using brokerage windows to invest in cryptocurrency. Moreover, he notes that the guidance was published without the regular notice and public comment process for issuing formal regulatory guidance.
Senate Democrats Call Out Fidelity
In the meantime, Sens. Elizabeth Warren (D-MA) and Tina Smith (D-MN) sent a letter to Fidelity CEO Abigail Johnson in response to the firm’s decision to allow Bitcoin investments for 401(k) plans, given the DOL’s warning about allowing crypto investments in 401(k) plans.
“We write to inquire about the appropriateness of your company’s decision to add Bitcoin to its 401(k) investment plan menu and the actions you will take to address ‘the significant risks of fraud, theft and loss’ posed by these assets,” the senators wrote.
In the May 4 letter, Warren and Smith provide a list of questions asking Fidelity to explain, among other things, why the organization “ignored” DOL’s warning, what risks does Fidelity assess that Bitcoin presents to its customers, and what fees customers will incur by investing in Bitcoin. They ask for a response by May 18.
The senators also raise concerns about potential conflicts of interest presented by Fidelity being both a Bitcoin miner and a purveyor of Bitcoin. “We are also concerned about Fidelity’s potential conflicts of interest and the extent to which they may have affected the decision to offer Bitcoin,” the lawmakers continued, in asking how the firm went about in making its decision.
“In short, investing in cryptocurrencies is a risky and speculative gamble, and we are concerned that Fidelity would take these risks with millions of Americans’ retirement savings,” the senators argue.
In a direct statement to The Wall Street Journal, representatives from Fidelity indicated that they “look forward” to continuing a dialogue with regulators and policymakers and will respond directly.