But, due to the tone of the DOL’s statements, it was more than that. For example, the CAR said: “The Department cautions plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.”

Government regulators seldom use words like “extreme” and there isn’t any legal standard of “extreme care.” As a result, the language was viewed as threatening.

To compound matters, the DOL’s CAR went on to say: Based on these and other concerns, “EBSA expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments.”

Whether intended or not, that statement was viewed as a threat that, suggesting if fiduciaries included a cryptocurrency option in their plan’s lineup, they would be investigated and their decision could be challenged as a fiduciary breach.

Heightened Scrutiny for Brokerage Windows 

However, that wasn’t the most controversial provision in the CAR. The DOL then went on to say: “The plan fiduciaries responsible for overseeing such investment options or allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks described above.”

The understanding was that a brokerage window was a “service” rather than an “investment.

It has generally been understood that plans could offer brokerage windows and not be responsible for the quality, costs, or features of the investments inside the brokerage window. Instead, the understanding was that a brokerage window was a “service” rather than an “investment.” As a result, the fiduciary responsibility was to evaluate the costs assessed by the brokerage window provider, the services of the provider, and the financial stability of the provider. In fact, several years ago when the DOL opined that, if a number of participants were invested in the same securities in a brokerage window, those investments could be viewed as “designated investment alternatives” (DIAs) and would need to be prudently monitored, the private sector pushed back, and the DOL abandoned that position.

However, the CAR now raises the issue of, “when are plan fiduciaries responsible for investments offered through a brokerage window in a 401(k) plan?” That is because the DOL said that it will investigate plan fiduciaries and question “how they can square their actions with their duties of prudence and loyalty in light of the risks described above.”

The risk for fiduciaries is heightened by the recent Supreme Court decision in Hughes v. Northwestern University.

As background, Northwestern University sponsored two participant-directed 403(b) plans with over 400 investment options. (For ease of reference, this article refers to the “plan,” since the issues were the same.) Since the University is a private school, its plan is subject to ERISA. As a result, the holding in the case also applies to 401(k) plans and their fiduciaries (e.g., plan committee members).

The plaintiffs were participants in the plan and sued on behalf of the “class” of all participants, claiming that the fiduciaries allowed the plan to overpay for its investments (that is, the expense ratios of the mutual funds) and for recordkeeping services. The attorneys for the University argued that, since the plan offered over 400 investments, the participants could have selected investments that met their needs and, by choosing low-cost funds the participants could have limited the expenses they paid. If that position had been upheld by the Supreme Court, the consequence would have been that, by offering a large number of choices, the burden of deciding which investments were prudent would be shifted from the fiduciaries to the participants.

By analogy, the attorneys for the University were arguing that there wasn’t a fiduciary duty to prudently select and monitor a plan’s investments, so long as enough investments were offered. That, of course, is exactly what a brokerage window does. It offers a very large number of options, sometimes in the thousands and places the burden on the participants to select the ones that are best for them. To be clear, the University didn’t argue that the 400 investments constituted a brokerage window. The case was about 400+ designated investment alternatives.

The Supreme Court, in a unanimous decision, ruled that plan fiduciaries have a duty to include only prudently vetted investments in a plan’s lineup. The Court explained the conclusion in terms of the fiduciary duty to monitor.

Justice Sonia Sotomayor wrote the opinion. Her discussion of the law begins with a reference to the Supreme Court’s 2015 decision in Tibble v. Edison International: 

In Tibble, this Court interpreted ERISA’s duty of prudence in light of the common law of trusts and determined that “a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.” Like petitioners, the plaintiffs in Tibble alleged that their plan fiduciaries had offered “higher priced retail-class mutual funds as Plan investments when materially identical lower priced institutional-class mutual funds were available.”… Thus, “[a] plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones.”

The law is clear: fiduciaries must prudently select and monitor the investments offered to participants.

With that conclusion, the law is clear: fiduciaries must prudently select and monitor the investments offered to participants.

Coming full circle, if investments are offered to participants—so-called designated investment alternatives—a plan’s fiduciary must prudently select and monitor them. That was what the DOL was referring to in the CAR when it said: “EBSA expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products….”

While somewhat threatening, because of the reference to investigating fiduciaries, the concept of a duty to prudently select and monitor the investments “offered” to participants is not novel and, of course, was reinforced by the Supreme Court’s decision in Hughes v. Northwestern University.

But, are the investments in a brokerage window “offered” to participants? If so, under the Northwestern University decision, they must be monitored and, if not prudent, they must be removed…a virtual impossibility in light of the thousands of available investments in brokerage windows. As explained earlier, the longstanding understanding is that a brokerage window is not an investment and that the investments inside brokerage windows are not “offered,” that is, are not DIAs.

However, the DOL said: “The plan fiduciaries responsible for overseeing such investment options or allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty….”

The rhetorical question is, if there isn’t a duty to prudently select and monitor the options in a brokerage window, why do fiduciaries need to “square their actions with their duties of prudence and loyalty?”  Of course, the answer is that they wouldn’t.

Concluding Thoughts

Where does this leave us? With uncertainty.

The DOL’s position on fiduciary oversight of “offered” investments (or DIAs) is well understood and has been reinforced by the Northwestern University case. The DOL’s position on brokerage windows, less so. As a result, there is a need for clarification.

DOL officials have since offered a bit of clarification. For example, stating that the Department wasn’t changing its position that the individual investment in brokerage windows don’t need to be monitored—at least by traditional metrics. But they’ve also said that the Department has never taken the position that fiduciary responsibility stops at the doorsteps of brokerage windows, leaving us with some uncertainty about what the remaining fiduciary responsibility is. One possibility is that investments that are highly volatile and can potentially lose all or substantially all of their value should be avoided. But that is just a reasoned guess.

The moral of the story is that plan sponsors need, as fiduciaries, to be aware of these developments and, with the help of their financial professionals, determine what, if any, risk they are willing to take.