Labor Department warns about adding crypto to 401(k) retirement plans

Yahoo Finance's Alexis Keenan joins Yahoo Finance Live to discusss the Department of Labor's warning following Biden's executive order on crypto.

Video Transcript

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EMILY MCCORMICK: Welcome back. As cryptocurrency adoption grows, the Labor Department is out with a warning about the risks of keeping digital tokens in your retirement accounts. Yahoo Finance's legal reporter Alexis Keenan joins us for the details. Alexis?

ALEXIS KEENAN: Right, Emily. Now, this all comes on the heels of President Biden's executive order to require that federal agencies do some research to determine how they can protect consumers from the perils of cryptocurrency. Now, this warning from the DOL, the Labor Department, Is about 401(k) plan fiduciaries. It's targeting them saying that they're legally on the hook if they breach their fiduciary duty by adding what they call imprudent crypto and cryptocurrency-tied investments to 401(k) plans.

In the warning, what's called a Compliance Assistance Release, the Department of Labor said this. "Fiduciaries who breach these duties are personally liable for any losses to the plan resulting from that breach." They went on to say that the Department plans to probe into plans that offer crypto investments. Now, the Department laid out specific concerns over these cryptocurrency investments finding a home inside 401(k) plans. They talked about the idea that crypto is subject to extreme price volatility. They also said that the investments are new to investors and fund managers, and therefore, there are a lot of both investors and managers who are inexperienced in the asset.

They also talked about the vulnerability of these assets to loss and theft that we've covered so much on Yahoo Finance. And they also said the valuation of the assets tends to be unreliable still. Still, yet, they talked about regulation unfolding in this area, and having so many questions about, really, what those regulations will entail.

Now, I talked with one cryptocurrency executive who founded a company really specifically to host cryptocurrencies inside of IRAs-- so another type of retirement investment vehicle here. Now, he said that it's a good thing that the Department of Labor is proceeding with some caution here. But eventually, he expects they're going to have to make a paradigm shift. He talked about the fact that few workers really have access to 401(k)s in the first place, and that eventually, the fact that there's a finite amount of cryptocurrency will cause the volatility of the assets to drop.

So let's just quickly take a look to that point and show the prevalency of retirement plans that are offered by US employers. As of 2020, according to Statista, 52% of employers offered their workers employee-funded plans. Then, 17% were offering employer-funded plans-- a much smaller number there. Still yet, there are 41% that offered no retirement savings plan at all.

So how much of a concern this is is, of course, attached to how many Americans and US investors are really participating in these types of investment. But still a lot to come, and certainly, the administration has the sweeping mandate for all of federal agencies to take a look at cryptocurrencies. This just happens to be the first foot out, with the Department of Labor here making a very strong statement that fund managers do need to be careful in this area.

- Hey, Alexis, Dave here. Very surprising when they say it's extremely difficult even for expert investors to evaluate these assets and separate facts from the hype. Strange to hear the administration to have a take on that. Do we know how common crypto is in 401(k)s, and has this had any impact on the market?

ALEXIS KEENAN: I think it is completely uncertain how common it is. It is definitely something that is starting to happen, and that is what is piquing their interest here. But look, yes, on one hand, there have to be protections. Some suggest, have suggested to limit the percentage of assets within a retirement plan that could be held in cryptocurrencies. That may be one way for the Department and other regulators to get their arms around this.

But a really fast-moving area. But the Department is promising-- promising-- that they will be asking fund managers and those who are responsible for picking the investments inside of 401(k)s, that they will be knocking on the door and asking a lot of questions.

- Well, thank you for that. Alexis Keenan there reporting.