ARI SHAPIRO, HOST:
Pension fund managers are dipping their toes into crypto, and government regulators are saying, be careful. That concern over whether retirement funds should get mixed up with new kinds of investments is an old one. Wailin Wong and Darian Woods from Planet Money's The Indicator explain.
WAILIN WONG, BYLINE: The 1960s were a boom time for private pension plans. And by 1970, these pensions were holding over $100 billion of assets.
DARIAN WOODS, BYLINE: But this growth also brought problems, like corruption and mismanagement. The government and President Gerald Ford stepped in.
WONG: On Labor Day 1974, the president signed a new law called the Employment Retirement Income Security Act, or ERISA. ERISA established that pensions needed special protections, which meant the people who managed that money should be held to high standards. They should follow something called the prudent man rule.
M R SAUTER: The prudent man standard says if you're a fiduciary of a trust, you have to make your investments in the way a prudent man would manage his own affairs.
WONG: M.R. Sauter is an assistant professor at the College of Information Studies at the University of Maryland, and they're quoting the original prudent man standard, which came out of a Supreme Court case from 1830. The language in ERISA was modified, but the basic principle was the same - when deciding how to invest, pension managers should channel this prudent man.
WOODS: For example, a prudent man puts his money in U.S. Treasury bonds and blue-chip stocks.
WONG: The new law also identified what the prudent man would not do. It said that investments in new or untried enterprises were imprudent, and this was very alarming to what was then a budding venture capital industry.
SAUTER: The venture capital firms that had just started getting involved with institutional investors were like, what happened to all that money?
WONG: And so this small but very motivated group of venture capital boosters started lobbying for changes to ERISA. And in 1979, they succeeded in getting a couple crucial changes to the prudent man standard.
WOODS: Change No. 1 was adopting a more flexible stance on risk.
SAUTER: It's this idea that high-risk investments are OK as long as you're balancing them with low-risk investments.
WONG: Change No. 2 - pension funds could put up to 10% of their assets in venture funds.
SAUTER: After the ERISA clarification in 1979, there are many people who come out of the woodwork and are like, this has saved venture capital.
WONG: So should a prudent person invest in crypto? Well, the Department of Labor is urging caution.
JASMIN SETHI: It is a guidance telling people to be on guard for the various risks.
WOODS: Jasmin Sethi is an associate director of policy research at Morningstar.
WONG: Jasmin says some of the biggest risks around crypto are a lack of consistent valuations and the absence of legal protections if something goes wrong.
SETHI: We don't want a bunch of people very upset about losses or hacking or other issues and then saying, oh, where's the government?
WONG: There are already signs of a sharp divide between the government and certain investors when it comes to crypto. One 401(k) provider has sued the Department of Labor over the guidance it issued. It says the agency is overstepping its authority and unfairly restricting crypto investments.
WOODS: So for now, it's looking like the government and the financial sector could be headed for another showdown over what the prudent investor should be doing.
WONG: Wailin Wong.
WOODS: Darian Woods, NPR News. Transcript provided by NPR, Copyright NPR.
NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.
