Employee Fiduciary Advocates for Participant Protections in DOL Comment Letter
In a comment letter to the Department of Labor (DOL), 401(k) plan provider Employee Fiduciary urged the federal agency to implement what it calls are “three participant-protection gaps” before finalizing its rule on alternative investments.
Employee Fiduciary is among the latest to comment on the DOL’s proposed “Fiduciary Duties in Selecting Designated Investment Alternatives,” which would expand access to private market investments in workplace retirement plans.
The proposal creates a six-factor framework for 401(k) investment selection and includes a process-based, regulatory safe harbor for plan fiduciaries who incorporate alternative investments in their retirement plans. Under the proposed rule, when selecting investment alternatives, “plan fiduciaries would need to objectively, thoroughly, and analytically consider, and make determinations on factors including performance, fees, liquidity, valuation, performance benchmarks, and complexity,” the DOL previously said in a statement.
Employee Fiduciary CEO Eric C. Droblyen notes that while backers of alternative investments like private equity firms, real estate funds, and cryptocurrency platforms have released statements celebrating the proposal, small business employers and participants have been less vocal on the matter.
“There has been considerably less commentary from participants and the small business owners who sponsor their retirement plans. We submitted this letter to put their interests on the record,” Droblyen said in a statement.
Employee Fiduciary highlighted three cracks in the proposal that it says must be closed prior to implementation. This includes fixing fee transparency with collective investment trusts (CITs), adding participant protections against crypto, and incorporating participant transparency rights.
The firm drew concerns over protections against private market CIT investments, as CITs are exempt from registering with the Securities and Exchange Commission (SEC) and are not subject to the same fee disclosure standards as other investments like mutual funds.
Employee Fiduciary also asked the DOL to implement four safeguards that would protect investors from unknowingly investing in cryptocurrency. This includes a participant opt-in requirement; a suitability standard modeled on blue sky law qualifications, thereby recognizing that retirement savings are the primary or sole source of financial security for many participants; enhanced independent valuation requirements; and a clarification that a benchmark constructed by an advisor with a financial relationship to the digital asset manager does not satisfy the rule’s benchmarking standard.
Finally, Employee Fiduciary suggested the DOL provide legal protections for participants as it does for plan fiduciaries. This includes an annual plain-language summary for each participant covering every investment option, the benchmark used, net-of-fees performance relative to that benchmark, and total fees in dollar terms, along with access to the six-factor documentation upon request. This documentation would also need to include a plain-language summary for participants to genuinely understand the topics and jargon at hand.
It also urged the agency to make additional clarifications to its safe harbor regulation, like articulating that the quality and specificity of documentation, not merely its existence, determines whether safe harbor protection is demonstrated.
“This rule has the bones of something genuinely good for participants,” Droblyen said. “But a process-based safe harbor is only as strong as the process it protects. Right now, the rule creates more certainty for plan sponsors than it does transparency for the people whose retirement security actually depends on getting this right.”
The DOL’s proposal, published on March 30, is currently in the midst of a 60-day comment period that has seen close to 30,000 industry leaders, firms, and experts submit statements on possible changes and suggestions for the final rule. Comments will be due on or before June 1.
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with nearly a decade of experience and a passion for telling stories and reporting news.