Borzi Sounds Alarm on Trump’s 401(k) Alternatives Order
Former Employee Benefits Security Administration Secretary Phyllis C. Borzi recently shared a laundry list of concerns with President Donald Trump’s Aug. 7 Executive Order, “Democratizing Access to Alternative Assets for 401(k) Investors,” during a media briefing hosted by the Institute for the Fiduciary Standard.
The Executive Order seeks to clarify the Department of Labor’s position on alternative assets with the intention of making it easier from a regulatory standpoint for workplace retirement plan sponsors to include alternative assets—such as private equity, real estate, private credit, infrastructure, commodities, cryptocurrencies, and lifetime income strategies—without running afoul of ERISA.
Borzi, who led EBSA the under the Obama administration from 2009-2017 and was awarded the Plan Sponsor Council of America’s Lifetime Achievement Award in 2020, said the order could undermine long-standing retirement plan safeguards. She expressed concern that, while marketed as a way to “democratize” access to sophisticated investment opportunities, the move would likely increase complexity, illiquidity, and costs in participant accounts—while making it harder for fiduciaries to fulfill their legal obligations under ERISA.
“There’s a reason these are called ‘hard to value’ assets. They’re complicated. The financial structure and the business structure of these transactions are not the slightest bit transparent,” Borzi said. “They result in high fees; they’re illiquid. And to me, the tool that’s most importantly missing in enabling fiduciaries to decide whether or not to include these types of asset categories in their plans is the lack of consensus around publicly available, non-industry generated performance measures.”
Borzi said the most troublesome part of the EO in her view is language buried in a section that directs the DOL to prioritize reduction of “frivolous litigation,” saying the DOL needs to issue guidance for fiduciaries allowing them to use their “best judgment” about whether to include these types of investments in their 401(k) lineups.
“What the heck is ‘best judgment’? I don’t even know what that means,” Borzi said during the briefing. “And it is totally—in my judgment—unenforceable. Unenforceable because no one will know what it means.”
As much as people might hate litigation, Borzi noted fiduciaries have a 50-year history of what “solely in the interest of participants” means, as well as what the “duty of prudence” and “duty of loyalty” means, which she said are “well-known as the highest standard of care in the marketplace.” Due to the EO’s ambiguous language, she said the courts are going to have to start over in trying to interpret “best judgment,” which she called a “creeping reduction in fiduciary standards.”
“When you think about who benefits from this, it’s obviously the financial institutions that have been lobbying for decades to open up the treasure trove of assets in 401(k) plans.”
Phyllis Borzi
At the same time they are introducing alternative investments that are “virtually impossible” right now for fiduciaries to evaluate, she noted that the Trump administration is dramatically reducing personnel and resources available to the DOL. “And the biggest hit comes in the enforcement area,” she said, “making it more difficult for the Department of Labor to enforce the current solely in the interest prudence and loyalty duty standards. So it’s very much opening the door to potential problems.”
Among them? EBSA’s lack of oversight wouldn’t prevent lawsuits from coming if plans featuring alternative investments underperform.
Borzi reminded that an Executive Order has no legal standing, and advised fiduciaries to carefully watch what the DOL does to implement this EO, because that’s where the legal liability comes in.
“When you think about who benefits from this, it’s obviously the financial institutions that have been lobbying for decades to open up the treasure trove of assets in 401(k) plans,” Borzi concluded. “There may come a time—if the market characteristics of these investments change dramatically—where it is unquestionably prudent for a fiduciary to include them in the plan lineup. At this point, I’m not sure that’s the case.”
Institute for the Fiduciary Standard President Knut Rostad, The AltView’s Tim McGlinn and Kathleen McBride of Fiduciary Wise also spoke out regarding the “Democratizing Access to Alternative Assets for 401(k) Investors” EO during the media briefing, which can be heard in its entirety at this link.
ADDITIONAL COVERAGE:
• DOL Rescinds Biden-Era Guidance Discouraging Use of Alts in 401(k)s
• Trump: Regulatory Overreach, Opportunistic Lawsuits Have Stifled Investment Innovation
• Private Equity in 401(k) Plans: Policy Shift or Practical Reality?
• Advisors Increasingly Support Private Market Funds in 401(k) Plans
• DOL, Industry Leaders React to Trump’s EO Signing on Private 401(k) Funds
• Should 401(k) Plans Offer Annuities and Alternative Investments?
• Private Equity’s Fast Lane to 401(k)s
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
