Lawsuit seeks to kill DOL guidance on using crypto in 401(k)s

Recent Department of Labor guidance warning retirement plans to think twice about offering cryptocurrency options to their participants has caused a lot of grumbling in the financial industry.

This week, plan provider ForUsAll Inc. went a step farther by going to court to get the DOL to rescind its guidance. In a lawsuit filed Thursday in a federal court in Washington, D.C., the company argued that the compliance assistance release the agency put out in March was arbitrary and capricious and exceeded DOL’s authority under federal retirement law.

The suit also alleges that DOL violated federal law on rulemaking by issuing the crypto guidance without engaging in a notice and comment process.

The DOL guidance didn't prohibit the use of cryptocurrency in retirement plans. But crypto investing can be risky and volatile. The agency cautioned plan fiduciaries to use “extreme care” before giving workers the option to invest their retirement savings in cryptocurrency. It also said that plans that do so either through a core menu or brokerage windows would be subject to DOL investigations.

DOL went too far with its crypto warning, said ForUsAll CEO Jeff Schulte.

“They’re attempting to effect a ban [on crypto],” Schulte said in an interview. “This is a very troubling precedent. It is an incredible overreach and a slippery slope we can’t leave unchecked.”

A DOL spokesperson did not immediately respond to a request for comment.

Tension between the DOL and financial industry has been building for weeks over whether to allow crypto investing by retirement savers. Not long after DOL released its guidance, Fidelity Investments announced that it's launching a crypto product on its 401(k) platform that will allow plan participants to invest in crypto through their company’s core investment menu.

On the sidelines of an industry conference last month, DOL assistant secretary Ali Khawar said that talks with Fidelity about its product did not ease his concerns about potential investor harm. Fidelity said that it has built safeguards into its product, which is answering a crypto demand from retirement investors.

A group of trade associations representing the financial industry wrote to the DOL last month asking it withdraw its crypto guidance. The agency has not done so.

“The only path forward is pursuing this in the courts,” Schulte said.

Lawyers not connected to the case had mixed opinions on the lawsuit’s prospects.

Tom Gorman, a partner at Dorsey & Whitney, said the DOL guidance is similar to cautionary statements from other regulators regarding the volatility and risks associated with cryptocurrency.

“I don’t see the DOL guidance as an effective ban,” said Gorman, a former Securities and Exchange Commission senior trial counsel. “There are legitimate concerns. DOL has a better legal position than the challengers.”

But Josh Lichtenstein, a partner at Ropes & Gray, said the phrase “extreme care” in the DOL guidance is something that can cause confusion given the fiduciary standard of care to which retirement plan fiduciaries are held under federal retirement law, the Employee Retirement Income Security Act.

“No one understands what [extreme care] means,” Lichtenstein said. “ERISA fiduciaries are already subject to the highest standard of care under U.S. law. It’s not as if ERISA fiduciaries [can be] lackadaisical with any asset class. If DOL wants to single out certain asset classes, that should go through notice and comment.”

ForUsAll is a retirement plan provider that specializes in alternative investments. It was the first to offer a crypto product.

The product will be available this summer through a self-directed window on its platform, Schulte said, adding that the product includes "guardrails" to protect investors, such as a 5% limit on the amount of crypto in a retirement portfolio.

The lawsuit is an attempt to preserve investor latitude in how they allocate their retirement savings, Schulte said. He's concerned the DOL guidance denigrates cryptocurrency, which he said can play an important role in a retirement portfolio.

“We can’t stand by while [the DOL] restricts Americans’ ability to make their own choices for their own retirement,” he said. “[DOL] doesn’t have the expertise or the legal authority. They’re not supposed to be picking winners and losers by banning an entire asset class.”

The lawsuit states that cryptocurrency “is a widely accepted asset class.” It also says that “no asset class is presumptively imprudent” under federal retirement law, which “does not mandate paternalism with respect to participant investments.”