The Department of Labor (DOL) on Monday released its highly anticipated proposed rule that could potentially broaden investor access to private market assets in defined contribution (DC) retirement plans.
The proposal, “Fiduciary Duties in Selecting Designated Investment Alternatives,” is asset-neutral in that it does not favor or disfavor any specific asset class or type. While President Donald Trump’s initial executive order in August specifically called out private assets, the DOL’s proposal emphasizes the fiduciary’s duty of prudence and process over product type.
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 said in a statement.
The DOL’s proposal builds on three core principles of the Employee Retirement Income Security Act of 1974 (ERISA), says Bonnie Treichel, ERISA attorney and founder and CEO of Endeavor Retirement. This includes the idea that “ERISA is grounded in process; ERISA gives maximum discretion and flexibility to plan fiduciaries; and when ERISA fiduciary decision-making follows a prudent process, arbiters of disputes [i.e., courts] should defer to fiduciaries under a presumption of prudence,” Treichel noted in an email statement.
The proposed rule also includes a regulatory safe harbor that would limit litigation risk for plan fiduciaries who incorporate alternative investments into their retirement plans. As the safe harbor is process-based, this means that “when a plan fiduciary follows the process described in the proposed regulation with respect to any of the six factors, its judgment regarding the factor [or multiple factors] is presumed to have met the fiduciary’s duties under section 404(a)(1)(B) of ERISA. This will matter in the future event of litigation because it creates the presumption that the fiduciary did the right thing,” Treichel added.
The DOL’s proposal will now enter a 60-day comment period, in which industry institutions and experts will be able to comment on possible changes and suggestions for the final rule.
Backers and opposers
In the meantime, industry leaders have already started releasing statements on the proposal, with many celebrating the potential increased access to alternative investments while one voiced skepticism and weariness in opening investors to a new asset class with a volatile history.
Among the first to welcome the rule was the American Retirement Association (ARA), who in a statement said the rule provides “helpful clarity” for retirement plan fiduciaries.
“Plan sponsors and their fiduciary advisors, not the federal government, are in the best position to assess market developments and determine what will be in the best financial interests of participants and beneficiaries,” said Brian Graff, CEO of the ARA. “The proposed rule is not an endorsement of any particular type of asset class. Rather, this rule reinforces that fiduciary system, and by providing additional guidance on how to evaluate and monitor investment options, the Department has given fiduciaries a clearer roadmap for meeting their obligations while preserving the flexibility they need to act in the long-term best interest of the tens of millions of American workers relying on 401(k) plans for their retirement.”
Other backers of the proposal include the Investment Company Institute (ICI), BlackRock, recordkeeper Empower, Pinpoint Policy Institute, and the Managed Funds Association (MFA).
“More than 155 million Americans are covered by ERISA plans, and they will benefit from expanded access, such as by allowing target-date funds to add private market assets as a component of their investment portfolios. We look forward to continuing to work with the DOL on a final rule that support innovation and maintains the robust investor protections Americans currently benefit from,” said the ICI in a statement.
“The Department’s current proposal, ‘Fiduciary Duties in Selecting Designated Investment Alternatives’ takes a balanced, investment-neutral approach. It reinforces that those responsible for managing retirement plans investments should follow a thoughtful, disciplined process focused on delivering the best interests for participants, while maintaining flexibility in how investment decisions are made,” stated Empower in an emailed statement.
“The Department of Labor’s proposal represents an important and welcome step in advancing the President’s executive order to modernize retirement plans for tens of millions of Americans. BlackRock supports this and other policy initiatives that thoughtfully expand access to investments historically out of reach, enhance diversification, and improve long-term outcomes, including for the more than 35 million Americans we help prepare for life after work,” wrote Martin Small, chief financial officer and global head of Corporate Strategy at BlackRock.
“This is a significant step toward fulfilling President Trump’s vision for a stronger and more secure retirement for America’s workers,” said Eric Ventimiglia, executive director of the Pinpoint Policy Institute. “For too long, everyday Americans have been shut out of private market investments that wealthy and pension fund investors have utilized to diversify their portfolios and drive returns. The Department’s proposed rule presents a clear and compelling roadmap for leveling the playing field for all investors, limiting the threat of trial lawyer lawfare, and putting the interests of American workers and retirees first.”
MFA, the trade association representing the global alternative asset management industry (including hedge and private credit funds) released a statement Monday morning. “Pensions have long used alternative investments to help secure retirements, and 401(k) savers deserve similar access to a wide range of investment options. Research shows portfolios that include alternative investments can improve long-term performance while reducing risk,” said MFA President and CEO Bryan Corbett. “We commend the Department of Labor for taking steps to give more Americans the choice to access alternative investments with robust investor protections.”
On the other hand, the Private Equity Stakeholder Project voiced concerns over expanding private equity and private credit to 401(k) retirement plans, noting that the move could possibly expose workers to “higher fees, lower returns, and opaque risks that are poorly suited to retirement savings.”
It also called out the regulatory safe harbor, which could “limit the ability of consumers to sue if private equity managers or 401k managers or providers make recommendations that are contrary to their fiduciary duty to retirement savers,” and shield 401(k) fiduciaries from liability, the PESP said in a statement.
“Private equity firms should not get a free pass to loot workers’ 401K retirement savings; PESP opposes any safe harbor that would weaken fiduciary protections for retirement savers,” said Jim Baker, executive director of PESP. “At a minimum, the Department of Labor should hold private equity to the same disclosure and transparency standards expected of publicly-traded stocks, mutual funds, and ETFs, including clear reporting on what funds are investing in, the fees and expenses retirement savers are paying, the amount of debt funds are using, and how these investments are actually performing compared with stocks.”
Additional reaction
ERISA Industry Committee (ERIC): “Today’s proposed rule is a meaningful and important step by the Department of Labor to bring needed clarity and certainty for retirement plan managers selecting the options to be made available to plan participants. Too often, fear of meritless litigation reduces innovation in 401(k) investment offerings – and we applaud the Department’s work to ensure that plan managers will have a framework on which they can rely to evaluate traditional and emerging investment options, including private market alternatives and lifetime income strategies. We are carefully reviewing the details and expect to offer comments to the Department,” said ERIC Senior Vice President of Retirement and Compensation Policy, Andy Banducci.
Aon: “Private investment strategies can offer diversification benefits when used appropriately, but their inclusion in defined contribution plans hinges on strong fiduciary governance. The proposed rule reinforces that ERISA prudence is about process, requiring sponsors to objectively assess factors such as fees, liquidity, valuation and participant impact. Plan sponsors should work to understand what, if anything, changes for their specific plans and governance frameworks, and that they are sufficiently prepared to support disciplined evaluation and ongoing oversight of investment options,” said Ari Jacobs, global head of Investments at Aon.
Insured Retirement Institute: “IRI supports a more accommodating regulatory framework that facilitates greater use of lifetime income products, such as annuities, in defined contribution plans. Expanding access to protected, guaranteed lifetime income can help more of America’s workers and retirees achieve financial security in retirement,” stated the Insured Retirement Institute.
Ropes & Gray LLP: “The Department of Labor has proposed a regulation that, if finalized substantially as proposed, would reshape how ERISA fiduciaries document and defend the selection of every investment option on a 401(k) menu. The rule establishes a single, asset-neutral safe harbor that applies to alternatives and traditional assets, under which fiduciaries who follow a rigorous process across six non-exclusive factors (performance, fees, liquidity, valuation, benchmarking, and complexity) receive a presumption of reasonableness and “significant deference” on their judgments. Alternatives and traditional assets sit on the same playing field, subject to the same process, even though more complex assets will naturally require deeper analysis. The rule’s explicit objective is to reduce litigation risk, and these safe harbors could become operational check lists that plan fiduciaries rely on along with a combination of representations and expert advice to confidently make decisions based on the interests of participants, not the fear of litigation,” said Ropes & Gray ERISA and Benefits partner Joshua Lichtenstein.
EDITOR’S NOTE: This article is being updated to include more industry reaction as it becomes available on today’s breaking news.