Last week the White House issued an executive order directing the Department of Labor (DOL) and Securities and Exchange Commission (SEC) to facilitate 401(k) participants’ access to alternative investments, including private equity, cryptocurrency, real estate, commodities, and infrastructure financing. This direction includes the DOL reexamining guidance regarding fiduciary duties with respect to asset allocation funds, clarifying the DOL’s position regarding alternative assets and including them in asset allocation funds, and proposing related regulations and guidance.
It is important for plan fiduciaries to be mindful that ERISA’s statutory fiduciary duties of loyalty and prudence and the related case law associated with the selection and monitoring of 401(k) investment options still apply to the evaluation of whether private equity, cryptocurrency, real estate, or another alternative investment is an appropriate addition to a 401(k) plan’s investment menu the same way they apply to any investment option. Even if the DOL and SEC issue guidance resolving regulatory concerns with offering alternative investments as part of a 401(k) plan’s investment menu, plan fiduciaries and their investment advisors may still conclude that some or all alternative investments are not an appropriate addition to the 401(k) plan’s investment menu given some of the inherent characteristics of alternative investments.
Potential ERISA fiduciary concerns raised by alternative investments include: (i) high fees, (ii) lack of liquidity, (iii) high volatility, (iv) valuation challenges, (v) recordkeeping and custodian vulnerabilities, (vi) regulatory uncertainty, (vii) participant confusion, and (viii) litigation risks. Further, the addition of alternative investments to a 401(k) plan’s investment menu may draw the attention of plaintiff attorneys who could argue that:
- Courts are now free to disregard any regulations or guidance issued to facilitate 401(k) plans offering alternative investments following the Supreme Court’s 2024 decision in Loper Bright Enterprises v. Raimondo rejecting the prior approach requiring judicial deference to agency interpretations of ambiguous statutes, and
- The DOL’s departure from its prior guidance is not appropriate.
