Amid growing concerns from the Employee Benefits Security Administration and other industry experts about the risks associated with investing in cryptocurrency assets, the Government Accountability Office recently investigated the prevalence of crypto assets in the 401(k) market.

The GAO found that crypto only encompasses a small part of the 401(k) market, as of mid-2023, but the limited amount of data provided by the Department of Labor poses a barrier to fully measuring the scope of its prevalence in 401(k) plans. The report was commissioned by Representative Richard Neal, D-Massachusetts, the ranking member of the House Committee on Ways and Means.

In its report, the GAO identified 69 crypto asset investment options available to 401(k) participants either through their core investment options or self-directed brokerage windows. EBSA officials told the GAO that no matter how crypto asset investment options are marketed, fiduciaries are responsible for determining whether such options should be included in their plan’s core investment lineup or should be offered through a separate arrangement.

Recordkeepers surveyed by the GAO between July and September 2023 reported that none of the plans they served offered crypto investment options in their core lineups and reported minimal participant investment in crypto investments through self-directed brokerage windows. The investment amounted to substantially less than 1% of the 401(k) market, whether measured by plans, participants or assets.

In its analysis of investment returns, the GAO found that crypto assets have uniquely high volatility and that their returns can come with “considerable risk.” The GAO’s simulation found that a high allocation—20%—to bitcoin, the crypto asset with the longest price history, can lead to higher volatility than smaller allocations.

Cryptocurrency’s Encouraging Future

On Thursday, bitcoin traded higher than $100,000 for the first time, fueled by investors predicting that President-elect Donald Trump will cement the place of cryptocurrencies in financial markets. This milestone also coincided with Trump’s nomination of crypto advocate Paul Atkins to run the Securities and Exchange Commission on Wednesday. Current SEC Chair Gary Gensler has been a critic of the crypto industry.

The total value of the crypto market has almost doubled over the year so far to hit a record of more than $3.8 trillion, according to data provider CoinGecko.

DOL guidance currently states that the fiduciary responsibility to be prudent in selecting and monitoring 401(k) plans’ core investment options does not change when crypto assets are offered. DOL officials told the GAO they generally have not required fiduciaries to select and monitor all options offered outside the core menu, such as through self-directed brokerage windows, in accordance with Employee Retirement Income Security Act standards.

As a result, participants who invest outside the core menu have to take primary responsibility for selecting and monitoring crypto asset investment options.

Data Collection Can Be Improved

Industry data from a 2021 report on self-directed brokerage windows indicated that between 15% and 20% of defined contribution plans restrict self-directed brokerage window offerings to mutual funds, but the GAO argued that this does not fully restrict access to crypto investments, as three of the 69 crypto investment options identified by the GAO were mutual funds.

Overall, the GAO found that the DOL does not collect comprehensive data to identify 401(k) plans that give participants access to crypto assets. For example, the Form 5500s that plan fiduciaries file do not identify crypto asset investment options in plans with fewer than 100 participants. In 2022, 88% of 401(k) plans had fewer than 100 participants.

In addition, plans with at least 100 participants aggregate self-directed brokerage window investments, making it more difficult for the DOL to isolate investments in crypto assets.

In prior work, the GAO recommended that the DOL should consider revisions to the Form 5500 series that would provide more transparency and detail into plan investments, among other things. The DOL has taken some steps to improve Form 5500 reporting, but according to the GAO, its recommendation has not been fully implemented.

The GAO also recommended that Congress should consider legislation to fill gaps in federal regulatory oversight of crypto assets. For example, one bill introduced seeks to address issues such as the comingling of customer funds with institutional funds by crypto-asset trading platforms. However, none of these bills have become law.

The GAO provided a draft of its report to the DOL, the SEC and the Commodity Futures Trading Commission for review and comment.