The rapid collapse of FTX, one of the world's biggest cryptocurrency exchanges, which filed for bankruptcy on Nov. 11, underlines the risks of putting retirement funds into speculative investments—especially those offered by lightly regulated firms.
Many 401(k) and similar workplace plans allow participants to invest in a wide variety of investments through open "brokerage windows," including cryptocurrencies, and some plans now offer crypto investments as an investment menu option. Defined benefit pension plans also invest in crypto assets. While all cryptocurrencies and crypto exchanges may not have FTX's underlying problems, the risks of crypto investing should be understood by plan fiduciaries and participants.
"This kind of development serves as a reminder that fiduciaries should proceed with caution and be diligent in what investment options they're offering" within their retirement plans, said Wendy Von Wald, fiduciary product manager at Travelers, a property and business insurer. "Because fiduciaries are required by law to act in the best interests of plan participants, choosing to offer something like cryptocurrency, which is perceived by many to be uncertain and volatile, could be viewed as imprudent and a breach of fiduciary duty."
SHRM Online has collected the following articles that highlight what plan fiduciaries should know in light of the collapse of FTX.
FTX Collapse Triggers Crypto Crisis
Investors continue to grapple with the stunning implosion of FTX, one of the biggest and most powerful players in the industry.
Some industry insiders have said the company's downfall triggered a "Lehman moment," referring to the 2008 collapse of the investment bank that sent shockwaves around the world.
The episode not only has destroyed confidence in the crypto industry but also will embolden global regulators to tighten the screws. Some of the biggest names in the business said they will welcome the scrutiny, if it helps restore faith in the industry.
FTX Bankruptcy Chills Crypto's Prospects in Retirement Plans
No matter the outcome of FTX filing for Chapter 11 bankruptcy, industry experts say financial and retirement advisors may be chilled on recommending the asset, which is currently in use by some plan sponsors via offerings from industry leader Fidelity Investments and small-business plan provider ForUsAll.
The events have added to concerns voiced by some in the retirement industry, including regulators, that cryptocurrency inclusion needs serious consideration to meet the fiduciary standards enforced by the U.S. Department of Labor through the Employee Retirement Income Security Act (ERISA).
DOL Guidance Warns About Crypto Investments
Guidance issued by the U.S. Department of Labor (DOL) in March warned 401(k) plan fiduciaries to "exercise extreme care" before adding cryptocurrency options to plan investment menus.
The guidance extended its warning not only to plans that offer crypto as a designated investment, but also to plans that let participants invest in stocks, bonds and other securities through an open platform known as a brokerage window, also referred to as a self-directed brokerage account.
"The plan fiduciaries responsible for overseeing [cryptocurrency] 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 guidance stated.
Defined Benefit Pensions Have Crypto Investments
Last October, the Ontario Teachers' Pension Plan Board invested $75 million in FTX Trading Ltd.'s preferred stock. (FTX Trading Ltd. is the owner and operator of FTX.com.) Early this year, the pension plan invested another $20 million in FTX.
The 2022 CFA Institute Investor Trust Study found that 94 percent of state/government pension plan sponsors and 62 percent of corporate defined benefit plan sponsors invest in crypto assets, as institutional investors believe that a small allocation to digital assets could be beneficial to a diversified portfolio.
(Mintz via JDSupra)
FTX Customers Face a Long Road to Try to Get Their Money Back
FTX was a survivor in a broad market crash that has taken down a number of crypto firms this year. But its collapse has left customers wondering if they will ever see their money again. It isn't clear how long it might take customers to get their money back, or whether they will get anything at all.
(The Wall Street Journal)