Government Regulators Express Concern as Pension Fund Managers Plunge into Crypto

By Wailin Wong | NPR
Friday, September 9, 2022

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Should pension funds invest in risky assets like crypto? This recalls an earlier debate, which involved a fledgling venture capital industry and the so-called prudent man rule.



Pension fund managers are dipping their toes into crypto, and government regulators are saying, be careful. This concern about whether retirement funds should be mixed with new types of investments is an old one. Wailin Wong and Darian Woods of Planet Money’s The Indicator explain.

WAILIN WONG, BYLINE: The 1960s were a boom time for private pension plans. And in 1970, these pensions held more than $100 billion in assets.

DARIAN WOODS, BYLINE: But that growth has also brought problems, like corruption and mismanagement. The government and President Gerald Ford intervened.

WONG: On Labor Day of 1974, the President signed a new law called the Retirement Income Security Act or ERISA. ERISA determined that pensions needed special protections, which meant that the people handling that money had to be held to high standards. They should follow what is called the prudent man rule.

Mr. SAUTER: The prudent man standard says that if you are a trustee of a trust, you must make your investments the way a prudent man would manage his own affairs.

WONG: Mr. Sauter is an assistant professor in the College of Information Studies at the University of Maryland, and they cite the original prudent man standard, from an 1830 Supreme Court case. The language of ERISA was changed, but the basic principle was the same – when deciding how to invest, pension managers should channel this cautious man.

WOODS: For example, a prudent man puts his money in US Treasuries and blue-chip stocks.

WONG: The new law also identified what the prudent man would not do. He said investments in new or unproven businesses were reckless, which was very alarming for what was then a fledgling venture capital industry.

SAUTER: Venture capitalists who had just started engaging with institutional investors wondered, what happened to all that money?

WONG: And so this very motivated little group of venture capitalist boosters started pushing for changes to ERISA. And in 1979, they managed to get some crucial changes to the prudent man standard.

WOODS: Change #1 was taking a more flexible stance on risk.

SAUTER: It’s this idea that high-risk investments are okay as long as you balance them with low-risk investments.

WONG: Change #2 – pension funds could place up to 10% of their assets in venture capital funds.

SAUTER: After ERISA was clarified in 1979, there are a lot of people who come out of the woodwork and think that it saved risk capital.

WONG: So, should a prudent person invest in crypto? Well, the Department of Labor urges caution.

JASMIN SETHI: This is a guide encouraging people to beware of different risks.

WOODS: Jasmin Sethi is associate director of policy research at Morningstar.

WONG: Jasmin says some of the biggest risks in crypto are the lack of consistent valuations and the lack of legal protections if something goes wrong.

SETHI: We don’t want a group of people to be very upset about losses, piracy or other issues and then say, oh, where is the government?

WONG: There are already signs of a clear divide between the government and some investors when it comes to crypto. A 401(k) provider sued the Department of Labor over the guidelines it issued. He says the agency is overstepping its authority and unfairly restricting crypto investments.

WOODS: So right now it looks like the government and the financial industry may be heading for another showdown over what the prudent investor should do.

WONG: Wailin Wong.

WOODS: Darian Woods, NPR News. Transcript provided by NPR, Copyright NPR.

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Dolores W. Simon