Trump administration gives green light for alternative assets in 401(k) plans

The Department of Labor recently rolled out a proposed rule seeking to deliver on its promise to allow more alternative assets into 401(k) plans. The rule, issued on Mar. 31, details factors fiduciaries should consider when selecting investments such as private equity or cryptocurrency for inclusion in a defined contribution plan.

While the Biden administration cautioned retirement plan sponsors against including such investment options in their 401(k) plans, the Trump administration has taken a more permissive view of alternatives. This proposed rule builds on an executive order issued by the White House last year seeking to democratize “access to alternative assets for 401(k) investors.”

The proposed DOL regulation is intended to lessen legal risk tied to such alternative investments, but the threat of lawsuits won’t go away entirely if it’s approved, sources told HR Brew.

DOL proposes safe harbor for plan fiduciaries. The proposed rule directs retirement plan fiduciaries to take six factors into account when evaluating investments: “performance, fees, liquidity, valuation, benchmarking, and the complexity of the designated investment alternative.”

This road map is part of a safe harbor designed to shield employers from litigation risk should they decide to incorporate riskier investments into their 401(k) plan offerings.

Historically, 401(k) plan sponsors have steered clear of alternative investments for fear of getting sued. Sources told HR Brew last fall that a safe harbor would be necessary to get more employers on board with allowing assets such as private equity into 401(k)s.

In the proposed rule, the DOL said it’s seeking to clarify that the Employee Retirement Income Security Act (ERISA) “gives fiduciaries (not opportunistic trial lawyers) the discretion and flexibility to determine when designated investment alternatives, including those that contain alternative investments, offer the opportunity for participants to maximize risk-adjusted returns on their retirement assets net of fees.”

The idea of the safe harbor is that plan sponsors will be “able to include alternatives more easily as a plan investment, at least with the Department of Labor’s blessing,” provided that they go through the process the agency has laid out, Karen Brandon, a shareholder with law firm Ogletree Deakins who heads up the firm’s fiduciary matters practice, said.

Legal risk still exists. Even if the DOL approves this safe harbor regulation, the threat of lawsuits from employees won’t go away, Brandon cautioned. She said a few areas where employers could still risk litigation if they don’t evaluate alternative investments properly include fees, as well as liquidity. Both of these factors are often cited as features that can make investments like private equity ill-suited for defined contribution plans.

The DOL regulation won’t change fiduciaries’ duties when it comes to ERISA so much as it will expand the types of investments they may consider for 401(k) plans, Edward Gottfried, VP of product at financial advisory company Betterment, told HR Brew. “It just changes the universe of possible investments that you could make a determination, where appropriate, to have in your plan.”

Investment firms have been preparing for the Trump administration to issue regulations on alternative assets, rolling out target-date fund solutions that would allow plan sponsors to easily incorporate them into defined contribution plans.

As employers evaluate such solutions, Gottfried recommended they consider not only levels of financial literacy among their employee base, but also whether participants are likely to need to tap into their 401(k) for an emergency. Considerations around equity (i.e., whether more highly-compensated employees are more likely to take advantage of alternative investment options) may also be relevant. “Those are the kinds of questions you should be asking yourself as you start to think through whether or not this would be reasonable or appropriate for your organization.”