Is Bitcoin a Prudent Investment for a Qualified Plan?

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Ernie Guerriero, CLU®,ChFC®,CEBS,CPCU®,CPC®,CMS,AIF®,RICP®,CPFA

I’m hearing more and more about cryptocurrency or Bitoin (Ethereum; XRP; Tether) and we now have the first Bitcoin 401(k) Plan (launched in May by Bitwage a payroll and invoicing service company). Keep in mind the Employee Retirement Income Security Act (ERISA) does not generally prohibit a 401(k) plan from providing access to a particular type of asset, so long as the asset is made available to participants who should be eligible to invest in it. However, being available and being a prudent investment are two very different concepts that must be analyzed.

Whether Bitcoin is a prudent investment must be viewed by the Plan Fiduciary in light of his/her investment duties. A Fiduciary must give appropriate consideration to those facts and circumstances that it knows or should know are relevant to the particular investment or investment course of action involved, including the role the investment plays in that portion of the plan’s portfolio with respect to which the fiduciary has discretion. The Fiduciary must also consider the investments role taking into account the participants and beneficiaries of the Plan.

The current Regulation [ERISA §402(a)(1)] sets forth a non-exclusive list of factors that should be evaluated in order to demonstrate the exercise of appropriate consideration, including but not limited to:
• the composition of the portfolio for purposes of diversification;
• the liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan;
• the projected return of the portfolio relative to the funding objectives of the plan; and
• the fiduciary has to compare the selected investment to available alternative investments.

The Fiduciary must only use objective risk-return criteria, such as benchmarks, expense ratios, fees, fund size, long-term investment returns, volatility measures, and mix of asset types (e.g., equity, fixed income, money market funds, diversification of investment alternatives, which might include target date funds, value and growth styles, indexed and actively managed funds, balanced and equity segment funds, non-U.S. equity and fixed income funds), in selecting and monitoring all investment alternatives for the Plan.

Most importantly the Fiduciary must carefully and fully document its selection and monitoring of the investment in accordance with the criteria above.

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