As anticipated, the Department of Labor (DOL) recently changed its position with respect to certain investment choices that 401(k) plan fiduciaries sometimes consider or make available to plan participants, including so-called environmental, social, and governance (ESG) investment choices and cryptocurrencies.
ESG
In a pending case before the Fifth Circuit Court of Appeals, the DOL indicated that it will no longer defend existing regulations (adopted during the Biden administration) relating to ESG investment choices. These regulations were recently upheld by a federal court in the Northern District of Texas. While plan fiduciaries were not required to take ESG principles into account when selecting investment choices for 401(k) plan, they could use such factors to make a selection if the investment choices otherwise had similar profiles.
While it remains somewhat unclear at this point what the DOL will propose to replace the current rules, regulations implemented during President Donald Trump’s first term directed plan fiduciaries to only consider financial parameters of risk and return when selecting investment options. These former rules could be reinstated, but the DOL could adopt requirements less neutral towards ESG investment choices.
Cryptocurrencies
The DOL also recently issued compliance assistance release No. 2025-01, which rescinds in full compliance assistance release No. 2022-01 issued during the Biden administration with respect to 401(k) plan investments in cryptocurrencies.
The 2022 guidance directed plan fiduciaries to exercise "extreme care before they consider adding a cryptocurrency option to a 401(k) plan's investment menu for plan participants." This was somewhat of a novel approach as the standard of "extreme care" is not found in the Employee Retirement Income Security Act (ERISA). But the 2022 guidance also did not impose penalties and did not require any particular processes or any additional safeguards for plan fiduciaries with respect to cryptocurrencies.
The DOL stated in its 2025 guidance that the "release restores the Department's historical approach by neither endorsing, nor disapproving of, plan fiduciaries who conclude that the inclusion of cryptocurrency in a plan's investment menu is appropriate."
Conclusions
Given the relative uncertainty surrounding the current views of the DOL with respect to ESG investment options, and whether fiduciaries actually could take into account non-financial factors in the selection of investment choices for 401(k) plans, fiduciaries should base their decisions on financial factors, and should be able to demonstrate that if ESG options are offered as investment choices in 401(k) plans, the selection of these options was indeed determined on the basis of such financial factors.
Similarly, with respect to potential investments in cryptocurrencies, while fiduciaries should no longer be concerned about exercising "extreme care" under the now rescinded 2022 compliance assistance release, the traditional rules set forth in ERISA and regulations adopted thereunder remain generally applicable. Cryptocurrencies do present a particular risk-return profile, which may or may not be appropriate for retirement savings in a 401(k) plan, and plan fiduciaries should again be able to demonstrate that the selection of cryptocurrencies as an investment choice was justified based upon the same financial factors.
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