Retirement plan fiduciaries are experiencing an increased interest from plan participants to add investment options that focus on environmental, social, and governance (ESG) criteria as well as cryptocurrency investments, given the continual media coverage of these two areas.
Fiduciaries have a duty to act in the best interest of plan participants, including in the areas of investment performance, compliance, and fees. With that in mind, are ESG and cryptocurrency investment options suitable for retirement plans?
Implementing a formal investment policy is an important first step and can help steer the committee in a consistent direction so that trends in the market or new investment offerings such as ESG funds or cryptocurrency are properly vetted, researched and, meet preestablished requirements. However, there are a few more important considerations to keep in mind for these two emerging investment areas, which we outline below.
Some retirement plans already have ESG options among their fund lineup, but most fiduciaries are taking a wait and see approach.
An important factor to keep in mind is that plan participants often choose the default investment options or revert to a target date fund and do not actively review their investment lineup. Plan participants’ increased interest in adding ESG funds to the investment lineup could gain traction to the point that a plan fiduciary may consider adding ESG funds as default investment options. The fiduciary may be faced with a difficult internal discussion about what is in the best interest of plan participants and whether adding ESG options to the plan truly benefits plan participants or aligns the plan with the values of the related participants.
The Department of Labor (DOL) recently proposed a rule to make it easier for retirement plan sponsors to consider ESG fund factors when they select fund investments. This proposed rule reverses a Trump-era rule that made it difficult to add ESG 401(k) options. It is currently in its comment period, with an anticipated mid-year 2022 timeframe for the final rule.
The DOL recently issued a release related to the addition of cryptocurrency options to plan lineups, outlining their concerns about the limited history of these investments, their highly speculative nature, extreme price volatility, and valuation uncertainty.
As the Supreme Court recently explained, “Even in a defined-contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.” Plan fiduciaries risk being held personally responsible for losses associated with poor investment selection, so they should exercise considerable caution when considering whether to add these types of fund options.
The DOL’s Employee Benefit Security Agency (EBSA), which is its enforcement arm, expects to conduct an investigative program aimed at plans offering cryptocurrency investment options and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to those investments. If your plan is considering allowing participants to invest cryptocurrencies, this current EBSA program should be monitored.
Plan fiduciaries have an important responsibility to oversee the plan in the best interest of participants. Higher-risk investment trends are probably better suited to an individual’s personal investment portfolio, if they so choose, rather than being added to a retirement plan’s investment lineup.
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