401(k) Crypto Case Crumbles in Federal Court

While a federal judge found some merit in the arguments alleging that the Labor Department’s compliance assistance release on cryptocurrency had an impact on a recordkeeper’s business, it wasn’t enough to warrant the relief requested. 

Image: Andrey Popov / Shutterstock.comThe History

Back in June 2022, recordkeeper ForUsAll filed suit against the Labor Department for its recent “arbitrary and capricious attempt to restrict the use of cryptocurrency in defined contribution retirement plans… .” ForUsAll has made its hay touting its retirement investment platform for small businesses as not only allowing employers to provide alternative investment options within 401(k) plans, nearly a year ago it announced a linkup with cryptocurrency platform Coinbase Institutional to offer cryptocurrency as the plan’s first alternative investment.  

But in the wake of the Labor Department’s “compliance assistance release” in March of that year on cryptocurrency investments in defined contribution plans, the suit claimed that “approximately one-third of the plans ForUsAll has discussed the matter with have indicated that, despite their interest in including cryptocurrency, they do not intend to proceed at this time in light of Defendants’ enforcement threats.”   

Then in September 2022 the Labor Department filed a motion to dismiss the suit, commenting that the release itself “does not have the force of law nor does it make new law. It instead reminds fiduciaries of their duties under the Employee Retirement Income Security Act of 1974 (ERISA).” And then, a month later, ForUsAll responded, claiming that “granting Defendants’ Motion would invite a brave new world of agency lawlessness,” the ForUsAll plaintiffs that have sued the Labor Department based on the impact of the latter’s position on cryptocurrency investments in retirement plans, have moved to dismiss their motion to dismiss. 

Bringing us to the case at hand.

The Decision

At the outset (ForUsAll Inc. v. U.S. Department of Labor et al., case number 1:22-cv-01551, in the U.S. District Court for the District of Columbia) U.S. District Judge Christopher R. Cooper granted the DOL’s motion to dismiss and denied an alternative motion from ForUsAll Inc. He noted that “ForUsAll seeks a declaration that the Release was unlawful, an order vacating and setting it aside, and an injunction preventing the Department from applying it in any manner. None of this requested relief, however, appears likely to redress ForUsAll’s alleged injury because ForUsAll fails to show that these actions would cause the third-party fiduciaries to renew their discussions or enter into the contemplated partnerships. Nor is the Release final agency action subject to judicial review.” And “[f]or these two reasons, the Court grants the Department’s motion to dismiss.”

After an interesting discussion of fiduciary roles and responsibilities, Judge Cooper commented, “Particularly relevant here, fiduciaries have a ‘duty to exercise prudence in selecting investments at the outset’ as well as ‘a continuing duty to monitor trust investments and remove imprudent ones.’” And then, turning to the implications for a self-directed brokerage account (SDBA) option in a plan, he commented “Plan providers, of course, ‘may restrict the types of investment options or even exclude specific investments within a type of investment option’ offered through their brokerage windows.’” But the Labor Department has wavered on whether they have any affirmative obligation to do so, leaving that question unanswered for now (citing Moitoso v. FMR LLC). He did, however, note that “the Secretary of Labor also has the power to initiate civil actions against entities for breaching their duties.  Additionally, the Secretary is authorized to investigate plan providers to ensure their compliance with ERISA.”

The Rationale

Judge Cooper noted that “…ForUsAll contends that the Release violates two APA provisions. It asserts that the Department violated 5 U.S.C. § 553 by issuing the Release without first going through the notice-and-comment process,” and that “it also contends that the Department violated 5 U.S.C. § 706 by acting in an arbitrary and capricious manner and in excess of its authority when, among other things, it jettisoned the applicable duty of prudence in favor of a special ‘extreme care’ standard for cryptocurrency and inaccurately suggested that plans’ fiduciary duties extend to their selection and monitoring of cryptocurrency investments offered through brokerage windows.”

That said, Judge Cooper made quick work of the arguments. “ForUsAll fails to meet its burden of demonstrating its standing to proceed in this Court and, regardless, has not stated a cognizable claim,” he wrote. “ForUsAll lacks standing because it is highly speculative that the requested relief would redress the alleged injuries to its business. Its APA claims also falter at the outset because the Release is not a final agency action and is therefore unreviewable.”

As for the claims regarding lost business, (even) “Accepting its allegations as true, ForUsAll suffered a concrete financial injury when several plans backed out of discussions to use ForUsAll’s services in offering plan participants access to cryptocurrency investment options. Yet the Department contends that this injury is not traceable to the Release nor redressable by the requested relief”—to which Judge Cooper agreed—in part. “Although ForUsAll adequately alleged that the retirement plans terminated their discussions because of the Release, there is not a reasonable basis for believing that the requested declaratory and injunctive relief would restart those negotiations and thereby cure the alleged injury. Without the power to provide effective relief, the Court must dismiss all claims.”

While accepting that the wording in the Compliance Assistance Bulletin “reasonably can be construed as threatening investigation and possible enforcement action against plans that offer cryptocurrency investment options”—and that that was a “substantial factor” behind the third parties’ decisions to discontinue their discussions with ForUsAll about offering cryptocurrency investments. And while Judge Cooper said “it would be improper at this stage for the Court to doubt this factual allegation, which is ‘specific, plausible, and susceptible to proof at trial’…”

However, he continued, “Establishing causation, however, does not get a plaintiff a ticket to federal court. ForUsAll still must clear the hurdle of demonstrating that this Court can provide adequate relief. It is there that ForUsAll stumbles.”

Relief Request Rebuffed

“ForUsAll requests that the Court declare that the Release is unlawful, set it aside, and vacate it,” Judge Cooper continued. “It is hard to see how those actions would restore these business prospects, however, because they would not change the facts underlying the Release that caused ForUsAll’s potential partners to cut and run in the first place.” He noted that “the Release reminds retirement plans that they have fiduciary obligations to participants under ERISA, outlines a list of ‘significant risks and challenges’ associated with cryptocurrency investments that the Department finds troubling, and alerts plans that the Department expects to conduct inquiries and investigations to ensure that these plans are complying with their duties when offering investment options in this area. All of this would remain the same if the Court vacated the order.” He noted that “plans would still have fiduciary duties to act with prudence under ERISA, and they would remain subject to possible investigations and enforcement actions by a Department that has expressed grave concerns about retirement plans offering investments in what it perceives as an overly risky market. Without clear evidence to the contrary, it is hard to fathom how this relief would restore ForUsAll’s lost business opportunities because it is doubtful that plan fiduciaries would disregard these lingering risks and partner with ForUsAll if the Release itself were no longer effective.”

That said, Judge Cooper also noted that “the Release does not bind regulated entities. While it warns plan fiduciaries that it may be difficult to square offerings in cryptocurrency with their obligations under ERISA, it does not prevent these companies from taking a different view of the matter. Indeed, some plans appear to have done just that by carrying on with their relationships with ForUsAll.”

Turning to the brokerage windows, Judge Cooper observed that “the Release does not extend fiduciary obligations to a previously duty-free domain or alter existing obligations in any way. It merely states that plans offering cryptocurrency options through their brokerage windows should be prepared to explain how those actions comport with their duties of prudence and loyalty—whatever those duties are.” He said that “ForUsAll reads more meaning into this sentence because it believes ERISA and the relevant regulations make clear that, while retirement plans have a duty to prudently select and monitor investment vehicles that they offer through their designated menu of investment options, all bets are off when it comes to the brokerage window.” But Judge Cooper noted that “the law on this issue is not as settled as ForUsAll suggests.” Moreover, he wrote that “the Release does not purport to change the status quo in this area as it leaves the existing law in place and ‘the world just as it found it.’” He said that it “seeks only to open a dialogue with retirement plans about how their cryptocurrency practices square with that pre-existing law.”

What This Means

While the fervor around cryptocurrency access in 401(k) plans seems to have muted (arguably due more to the vicissitudes of the market than the Labor Department’s admonitions) the court seems to have not only felt that the relief requested here was inappropriate, but that it wouldn’t have made a difference in any event. 

That said, and even considering arguments made with a bias toward accepting the plaintiffs’ arguments as valid, Judge Cooper ultimately seems to have viewed that the Labor Department operated comfortably within its legal “lanes” in reminding plan fiduciaries of their duties of prudence—and cautioning them that there were unknowns here that could ultimately be problematic.

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