U.S. Labor Department flags major risks of crypto investments in 401(k) retirement plans

• The U.S. DOL has warned strong legal action against financial services providers proposing crypto investments in 401(k) plans.
• It also cites several concerns with digital assets like speculative behavior, volatility, storage issues, regulatory issues, and much more.

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Earlier this week, U.S. President Joe Biden signed the executive order for crypto asking all federal agencies to coordinate on crypto laws. The executive order seeks to create a strong regulatory framework for the working of digital assets.

Read More: Bitcoin up 8%, Terra gains 21% as White House confirms Biden executive crypto order

Now, a day later, the US Department of Labor (DOL) has issued a warning of the risks involved with including crypto assets into retirement funds. The DOL cites crypto citing fraud, theft, and financial loss as “significant risks” and thus asks 401(k) investors to exercise “extreme caution”.

In its report released Thursday, March 10, the U.S. DOL said that any major crypto investment within company-sponsored retirement accounts can attract strong legal action. The 401(k) is a retirement savings plan offered by American employers. It seeks to provide long-term financial security for those who opt-in along with extended tax benefits.

The goal with the 401(k) is to offer safer investment options and minimize the risk of large losses. Also, the recent announcement from the U.S. DOL comes as there’s been a growing number of financial services that are marketing crypto investments as part of the 401(k) retirement plan. One of the major concerns the DOL has is the speculative and volatile nature of digital assets. In its accompanying blog post, the DOL adds:

At this early stage in the history of cryptocurrencies, however, the U.S. Department of Labor has serious concerns about plans’ decisions to expose participants to direct investments in cryptocurrencies or related products, such as NFTs, coins, and crypto assets.

Key Concerns with 401(k) Crypto Investments

In its detailed report, the U.S. Department of Labor has cited some key concerns relating to crypto investments in the 401(k) investment plans.

• Highly speculative and volatile: The DOL states that cryptocurrency is a highly speculative and volatile asset class. Furthermore, they are subject to extreme price volatility which makes them absolutely unsuitable for safe investment plans like the 401(k).
• Custodial Concerns: One of the biggest challenges with owning digital assets is their custody. Holding crypto in online digital wallets comes with its own risks and cold storage custody isn’t easy for an average investor. Also, losing or forgetting a password to your digital wallet could mean losing all your investments.
• Valuation Concerns: The U.S. DOL stated that one of its major concerns is the reliability and accuracy of valuing digital assets. “Experts have fundamental disagreements about important aspects of the cryptocurrency market, noting that none of the proposed models for valuing cryptocurrencies are as sound or academically defensible as traditional discounted cash flow analysis for equities or interest and credit models for debt,” it adds.

Furthermore, the U.S. DOL also cites some regulatory concerns which will be of course solved over a period of time. But until then, it’s not keen on 401(k) seeking higher crypto exposure.