Fidelity’s 401(k) Crypto Plan Sets Up Regulatory Guessing Game

Fidelity Investments Inc.’s decision to launch a 401(k) cryptocurrency product is beyond the scope of the U.S. Labor Department’s regulatory warning on such investments, but the giant money manager is firing its own shot across the agency’s bow that crypto belongs in retirement savings plans.

The multinational financial services firm seemingly snubbed guidance the Labor Department issued in March announcing an “investigative program” aimed at companies that offer crypto products.

But the company won’t be in the department’s crosshairs because the DOL’s regulatory authority extends only as far as fiduciaries that exercise direct control over U.S. retirement plans, not service providers like Fidelity that market products to them.

That leaves employer sponsors caught in a tough spot between one of the nation’s largest 401(k) recordkeeping platforms and a regulator cracking down on digital assets, despite workplace investors hungry for cryptocurrency exposure.

“The DOL should withdraw the guidance, take a step back and work with the industry to issue guidance that is actually helpful,” said Dave Gray, Fidelity’s head of workplace retirement offerings and platforms. “Digital assets are becoming increasingly mainstream, and we should lead and anticipate the needs of employers.”

‘Significant Concerns’

Fidelity says it’s responding to customer demand by offering a product that allows workers to allocate a portion of their retirement savings into bitcoin. The department’s guidance is misguided, Gray said.

“Money managers such as Fidelity can ignore this, because they do not believe themselves to be fiduciaries subject to fiduciary requirements,” said Jorge Leon, a partner at Michael Best & Friedrich LLP in Chicago. “They provide the platforms and leave the decision on the options to offer under the platforms up to the plan sponsors and administrators.”

The agency’s employee benefits regulator isn’t backing down, though. Agency officials told Bloomberg Law they aren’t planning to revoke the guidance, and that they are especially concerned about companies actively promoting cryptocurrency products.

March guidance from the Employee Benefits Security Administration warns plan sponsors that crypto assets are volatile and difficult to accurately value in the market. Even seasoned investors may have limited knowledge or experience trading digital coins, the agency said, making it difficult to “separate the facts from the hype.”

“There are significant concerns that we have about cryptocurrency,” Ali Khawar, acting assistant secretary at the Employee Benefits Security Administration, told Bloomberg Law. “That doesn’t mean that it’s banned—we were very clear that we are not banning cryptocurrency—but we were very clear that when you’re thinking about these things and you’re making them available and, importantly, when you’re actively promoting them, we will ensure they are in a participant’s best interests.”

Fidelity is among the nation’s largest 401(k) providers with more than 33,000 plans and 25.8 million participants. Gray said the company encourages participants to maintain an asset mix within their 401(k)s that aligns with their retirement horizon and risk tolerance.

“Like any other asset within their 401(k), individuals should make sure that any investment in bitcoin is part of their overall asset allocation strategy that maps to their long-term retirement savings goals,” Gray said.

The company said it is emphasizing that employers should work with their attorneys when considering what role cryptocurrency might play in the plan’s investment portfolio.

New Approach

Fidelity isn’t the first company to give 401(k) participants access to cryptocurrency assets, but it may be the first to do so in this way.

Others, such as low-cost provider ForUsAll Inc., have linked workers with cryptocurrency exchanges through investment accounts called brokerage windows. Fidelity’s Digital Asset Accounts product doesn’t rely on outside exchanges or brokerage windows. The company says it will hold onto the digital assets itself so that their value will reflect “institutional grade” securities.

Participants will be able to invest up to 20% of their total savings into the value account, but it’s up to the employer to determine if a smaller cap is more appropriate, Gray said.

Fidelity isn’t alone in rebuking the Labor Department’s efforts. Other financial industry groups representing retirement plan sponsors also want the the guidance revoked because it all but bans those types of investments without the DOL undertaking a formal rulemaking process.

“We are concerned about the Department issuing guidance on which investments are inherently appropriate or inappropriate,” the 11 groups wrote in an April 12 letter to the Employee Benefits Security Administration. “We are not aware of any legal basis on which the Department can proceed down this path, and this would set a concerning precedent for future announcements by any Administration about what investments are permissible.”