Fidelity’s cryptocurrency offering raises red flags at Labor Department

A few weeks after EBSA issued its March 10 compliance assistance report — but before Fidelity’s announcement — a group of 11 trade associations, including the American Benefits Council, ERISA Industry Committee and Securities Industry and Financial Markets Association, wrote to Mr. Khawar asking that EBSA withdraw its crypto guidance and “instead develop guidance in this area through notice-and-comment rule-making.”

“We are very aware that the line between helpful sub-regulatory guidance and indirect rule-making is not a clear one,” the letter said. “But we respectfully suggest that recent sub-regulatory guidance has been more in the nature of rule-making in need of notice and comment” and review by the White House’s Office of Information and Regulatory Affairs.

“The department’s new cryptocurrency position is inconsistent with current law, and adopted retroactively without notice or comment or OIRA review,” the letter said.

The trade groups asserted that EBSA’s comment about fiduciaries needing to exercise “extreme care” in evaluating the prudence of offering crypto investments “creates confusion to which fiduciaries are subject.”

Fidelity also complained. In an April 12 letter to Mr. Khawar, the company asserted that the compliance assistance report “does not provide any constructive guidance on how plan fiduciaries can address the issues identified by the Department and fulfill their fiduciary duties in assessing cryptocurrencies.”

The guidance document “should be withdrawn and/or clarified,” said the Fidelity letter, which was written by Mr. Gray.

Fidelity accused the department of going beyond informing fiduciaries of their responsibilities regarding cryptocurrency in 401(k) plans. Instead, the letter argued, the department seeks “to deem the selection of cryptocurrencies imprudent.”

On the other hand, 13 consumer and labor groups applauded the guidelines in an April 26 letter to Mr. Khawar. The guidance is “entirely consistent” with ERISA’s imposing “strict fiduciary duties on plan fiduciaries,” said the letter, whose signatories included the Consumer Federation of America and the AFL-CIO.

“We all agree that it is entirely appropriate at this stage in the market’s evolution that the Department caution plan fiduciaries to exercise extreme care when considering exposing plan participants to cryptocurrency assets,” the letter said.

Two U.S. senators wrote to Fidelity Investments CEO Abigail Johnson on May 4, asking why the company decided to offer cryptocurrency as a stand-alone investment in clients’ 401(k) plans.

“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,” said the letter from Sens. Elizabeth Warren (D-Mass.) and Tina Smith (D-Minn.).

They also asked Ms. Johnson to respond by May 18 to a series of questions including, “Why did Fidelity ignore DOL’s ‘serious concerns regarding the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies?'” and “What risks does Fidelity assess that bitcoin presents to its customers?”

Fidelity will respond directly to the senators, a company spokesman said in a May 5 email. “We look forward to continuing our respectful dialogue with policymakers to responsibly provide access with all appropriate consumer protections and educational guidance for plan sponsors as they consider offering this innovative product,” he wrote.