The Department of Labor said it has “serious concerns about the prudence” of financial advisors who seek to add cryptocurrencies to 401(k) retirement plans in a document released last week.

The document signals a potential warning that fiduciaries who might be advising 401(k) holders to invest in digital currencies may want to consider slowing down.

“These investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss,” the Labor Department said in a compliance document published on March 10.

Financial services firms have begun marketing crypto investments as potential investment options for 401(k)s, Ali Khawar, acting assistant secretary for the Employee Benefits Security Administration, wrote in a blog post last week.

“At this early stage in the history of cryptocurrencies, however, the U.S. Department of Labor has serious concerns about plans’ decisions to expose participants to direct investments in cryptocurrencies or related products, such as NFTs, coins, and crypto assets,” Khawar continued.

Khawar's blog post cites four "serious risks" when it comes to crypto and retirement savings:

• Valuation issues;
• Dramatic and quick volatility in prices;
• Obstacles to making informed decisions; and
• A quickly evolving regulatory landscape

Advisors must act in the financial interest of plan participants, with loyalty obligations considered the “highest known to the law,” according to the Labor Department, adding that “failure to remove imprudent investment options is a breach of duty.”

Cryptocurrencies, the department stated, are extremely volatile and speculative investments, and are often difficult for investors to make informed decisions — not to mention how difficult it might be for a person to lose control of their crypto wallet if they simply lose or forget a password.

“Plan fiduciaries responsible for overseeing such 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 in light of the risks described above,” the department said.

Christine Parlour, the Coleman Chair of Finance and Accounting at UC Berkeley Haas School of Business, is unsurprised by the government’s conservative recommendation.

“In other parts of the world, there’s broader adoption of cryptocurrencies as an asset class; in the U.S., there’s still some hesitation, especially on the regulatory side.”

The Biden administration, she noted, is seeking to change that with a “whole-of-government” approach toward crypto. On March 9, President Joe Biden issued an executive order seeking to examine the risks and benefits of cryptocurrencies and other similar digital assets.

Among other things, the administration’s order seeks to explore development of a U.S. Central Bank Digital Currency; calls on the Department of the Treasury to develop policy recommendations for regulation; and calls for mass agency coordination to mitigate illicit cryptocurrency use.

But at the moment, investing in crypto is still risky, Parlour said.

“There’s a huge amount of growth potential, but there are a lot of kinks to be worked out. For money mangers to work in this area, there has to be all of the infrastructure they need,” Parlour said. That financial infrastructure is well established for most assets—stocks, bonds, real estate—but crypto is still in its relative infancy.

“You can kick a house. It’s clear what it is and what you’ve got,” Parlour said. “With a house, I know all the bad things that can happen, and I can make my own personal investment assessment. Digital, I don’t know all the weird things that can happen; there’s an element of uncertainty.”

That’s not to say that crypto is a bad investment, Parlour, but that — as with all investment portfolios — it must come as part of a diversified investment plan.

“That makes finance people pull their hair out. A super risky asset is perfectly fin in a portfolio if you have lots of other stuff…but people who think they’re going to make a 500 percent return overnight? No no no no, don’t do that,” Parlour said. “Hold a well-diversified portfolio.”