Trump’s Private Equity 401(k) Push: 12 Legal Views

Brian Anderson

3 months ago

Trump’s Private Equity 401(k) Push: 12 Legal Views

A roundup of key insights from law firms in the wake of the Aug. 7 Executive Order

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President Donald Trump’s Aug. 7 executive order to expand private equity and other alternative investments in 401(k) plans quickly unleashed a wave of commentary from ERISA and private markets law firms.

President Donald Trump. Image credit: © Palinchak | Dreamstime.com

Attorneys are dissecting the move from every angle—highlighting opportunities for innovation in the $12 trillion DC market, warning of litigation and fiduciary risks, and predicting what regulatory agencies and Congress may do next. Combing through a wide variety of briefs, alerts, blog posts and updates released since the EO, 401(k) Specialist offers the following summary of their early takes (listed by most recent first), highlighting key compliance questions to keep in mind, expected regulatory clarifications, and what stakeholders should be watching for as the order takes shape. For those wanting to take a deeper dive, links to each full update are included.

Brownstein Hyatt Farber Schreck, LLP, Aug. 22: Trump Administration Begins Swift Implementation of 401(k) EO

Quotable: “The Trump administration is moving quickly to implement the president’s Aug. 7 executive order (EO) to expand retirement savers’ access to alternative investments in private markets through defined contribution (DC) plans, such as 401(k)s. This EO represents an historic policy shift that could fundamentally reshape how Americans save for retirement.”

Take Two: “The DOL, SEC and the Treasury Department will need to work through important issues as they develop new policies directed by the EO. In addition to the work being done by the agencies, there is momentum in Congress to pass legislation that is aligned with certain portions of the EO, including several bills that were recently advanced by the House Financial Services Committee.”

Take Three: “Despite the significant regulatory and litigation risk that this EO seeks to eliminate, there have been some efforts by the financial services industry to provide retirement savers in DC plans with access to alternative assets. For example, asset managers have begun offering limited exposure to private markets through pooled, professionally managed products such as target-date funds, collective investment trusts and exchange-traded funds. We expect market participants to continue innovating in this space, which provides an opportunity to engage with federal regulators as they seek to refine the policy initiatives contemplated by the president’s EO, following their swift initial steps last week.”

A&O Shearman, Aug. 20: Alts for all: Administration acts to open 401(k) plans to new asset classes

Quotable: “If fully implemented, the Order could fundamentally reshape the product ecosystem for DC plans, trigger new fiduciary best practices, and ultimately allow America’s 90-plus million 401(k) participants to obtain exposure—directly or indirectly—to asset classes long utilized by public pension funds, endowments, and other large institutional investors to enhance diversification and achieve potentially greater long-term investment returns.”

Take Two: “…the Order creates new opportunities for asset managers, private equity sponsors, real estate funds, infrastructure funds, and digital asset managers to develop and market products specifically tailored to the approximately USD12 trillion DC plan market. This could lead to the creation of new fund structures, such as collective investment trusts and hybrid vehicles, designed to accommodate the liquidity, transparency, and fee requirements of retirement plans.”

Take Three: “The plaintiffs’ bar has already expressed opposition to the Order and has indicated there will likely be court challenges to any rulemaking that seeks to limit participants’ and beneficiaries’ rights to pursue private actions under ERISA. Nonetheless, until the DOL issues final rules with concrete regulatory text and safe harbors, plan sponsors should expect plaintiffs’ counsel to continue scrutinizing alternative asset additions.”

McDermott Will & Schulte, Aug. 15: Trump EO Seeks to Expand Access to Alternative Investments in Retirement Plans

Quotable: “Regulatory guidance on how to address liquidity constraints common to alternative assets is needed because limiting access to retirement savings based on liquidity timing of alternative asset investment options may violate current law and plan terms. Liquidity constraints also prevent plan participants from changing investment elections and moving assets between a plan’s investment options on a daily basis, as is typical for defined contribution plans. Liquidity concerns may be one reason the order focuses on the use of alternative assets within asset allocation funds: Such funds may hold cash or other liquid investments that can be used for distributions to participants needing immediate access to their retirement savings while also holding alternative assets as long-term investments for participants who are many years away from retirement.”

Take Two: “Another challenge with utilizing alternative assets for defined contribution plans is valuation frequency. Investment in alternative assets can prevent plan participants from monitoring the growth of their retirement savings in real time, as most alternative assets are valued annually, unlike the stock and mutual fund investments typically offered in defined contribution plans, which are valued in real-time.”

Take Three: “…fees have become an increasingly critical focus for plan fiduciaries. Alternative assets typically require higher fees that must be benchmarked and balanced against the potential for greater long-term investment results.”

Next Page: Reducing liability exposure, core fiduciary obligations

Reducing Liability Exposure, Core Fiduciary Obligations

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Willkie Farr & Gallagher LLP, Aug. 14: New Executive Order Lays the Groundwork for ERISA 401(k) Plan Investment in Private Equity and Other Alternative Assets

Quotable: “…the Order specifically notes that litigation risk and regulatory uncertainty may have deterred plan sponsors from offering new products. The Order directs the DOL to explore measures that reduce ERISA fiduciary liability exposure, which raises the question of whether some kind of broader ERISA litigation reform at the congressional level will take place in conjunction with action at the agency level. The extent to which plan sponsors and fiduciaries are comfortable offering private equity and other alternative investments to 401(k) plan participants may depend on whether such ERISA litigation reform gains traction.”

Take Two: “Ultimately, any long-term changes to the fundamental notions of ERISA prudence and loyalty, and ERISA’s far-reaching prohibited transaction rules, as they are currently understood, will have to come not from the DOL, but from Congress. As a statute now more than half a century on the books, litigation challenges are likely to follow any Executive Branch attempts to revise core concepts of ERISA occurring outside of the legislative process.”

Holland & Knight, Aug. 13: Executive Order Calls for More Access to Retirement Plan Alternative Asset Investment Options

Conclusion: “The EO directs the relevant agencies to pave a path toward inclusion of asset choices not traditionally included in defined contribution plans. Full development of the path will necessarily take time. Regardless of how fast and wide the path becomes in the future, the core fiduciary obligations under ERISA remain the same. Therefore, plan sponsors and investment committees should continue to evaluate all plan investments through the lens of prudence, cost efficiency and participant best interests. Plan sponsors and fiduciaries should also be mindful that the risks associated with alternative assets, including potential limited liquidity, more complex fee structures and unique valuation considerations of private equity, may subject plan fiduciaries who choose to include these types of investments as plan options to increased scrutiny.”

Davis Wright Tremaine LLP, Aug. 13: Is Your Defined Contribution Plan Ready for Alternative Assets?

Quotable: “Will the lawsuits against defined contribution plans stop? That is the million-dollar question, but it is very doubtful. The Order states the Trump Administration will relieve the litigation risk and regulatory burden, so we await further guidance on how they will achieve this, especially given the Supreme Court decision in Cunningham v. Cornell University that makes it so much easier for a lawsuit to reach discovery and harder to win on a motion to dismiss. Moreover, plan fiduciaries would welcome the Trump Administration first addressing litigation risk related to non-alternative assets before worrying about risks associated with alternative assets.”

Next page: Strengthening present traction, SEC action, Wait for Guidance

Strengthening Present Traction, SEC Action, Wait for Guidance

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Cooley LLP, Aug. 13: Private Equity and Venture Capital Investments for 401(k) Plans?

Quotable: “Is there anything to do now? We think it is likely that, eventually, alternative investment options will find their way into more DC plans in some form or another. In the meantime, PE, VC and other alternative asset sponsors should consider what they might be able to contribute to a strengthening of the present traction, whether that includes reaching out to government regulators, plan fiduciaries or other stakeholders, or proactively working on solutions to the commercial and structural challenges posed by alternative assets that might make them more appropriate as offerings in DC plans.”

Mayer | Brown, Aug. 12: President Trump Signs Executive Order Seeking to Expand Availability of Alternative Assets in 401(k) Plans

Quotable: “With respect to the federal securities laws, the SEC has historically limited how participant-directed defined contribution plans have been able to access most privately offered alternative investment vehicles… The Order expressly contemplates the need for the SEC to revisit its existing guidance to facilitate access to alternative investments by defined contribution plans. Depending on what action, if any, the SEC takes in response to the Order, we may see asset managers develop new products that facilitate investments in alternative funds in defined contribution plans relying on the ICA exceptions in ways that were not previously available.”

Akerman LLP, Aug. 11: What Employers Should Know About Trump’s Executive Order on Expanding Access to Alternative Assets in 401(k) Plans

Next Steps: “The Order signals a potential shift in regulatory posture, but until the DOL issues new rules or guidance, the existing fiduciary standards and enforcement environment remain in place. Plan sponsors and fiduciaries considering alternative assets should:

• Monitor forthcoming proposals for new safe harbors or clarified prudence criteria.

• Review investment policy statements to address alternative asset evaluation and monitoring.

• Document all diligence on alternative assets, including analysis of liquidity, valuation, participant understanding, and cost relative to expected benefit.

• Prepare participant communications explaining the nature and risks of alternative investments and consider enhanced education efforts.

“While the Order raises the prospect of broader investment menus in 401(k) plans, plan sponsors and other fiduciaries should proceed under the current, more conservative standards until new guidance is issued. The key remains a well-documented, prudent process tailored to plan demographics and participant needs.”

Next page: Prudent evaluation, Accredited investors, Curbing ERISA litigation

Prudent Evaluation, Accredited Investors, Curbing ERISA Litigation

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Goodwin, Aug. 11: Trump Administration’s Executive Order to Facilitate Availability of Alternative Assets in Defined Contribution Plans: What Does It Mean?

Quotable: “Plan fiduciaries considering offering exposure to private investments in DC plans will need to factor in the risk of both private litigation and future changes in enforcement positions. Fiduciaries deciding to offer such exposure should ensure that they have—or hire—the expertise necessary to prudently evaluate private investments, that they engage in a prudent evaluation process and that they appropriately document such process and the conclusions reached. Among other things, that process should consider mitigating liquidity and overall risk through the use of pooled funds that offer daily or other high levels of liquidity backed by limited allocations to private assets and substantial allocations to diverse, highly liquid assets.”

Take Two: “With respect to subsequent actions on the part of the SEC, the Executive Order stipulates that the SEC may propose ‘revisions to existing SEC regulations and guidance relating to accredited investor and qualified purchaser status.’ To accomplish this, the SEC could propose and adopt amendments to Regulation D under the Securities Act and Rule 2a51-1 under the 1940 Act to provide for classifying retirement plan investors as ‘accredited investors’ and ‘qualified purchasers,’ respectively, under certain defined circumstances. Depending on the scope of any such amendments, they could further expand the pool of investors eligible to be offered private market strategies through retirement plans.”

What’s Next: “There are a number of plausible possibilities for subsequent DOL actions:

• The DOL could issue a formal advisory opinion containing the current Administration’s view. While such opinions are generally viewed by the regulated community with greater weight than less formal guidance, they have no legal effect in private litigation.

• The DOL could issue a class exemption providing legal relief from ERISA’s prohibited transaction rules, including permitting DC plan fiduciaries to include proprietary products in their plans. By its nature, however, such relief would not extend to other requirements under ERISA, such as the duties of loyalty and prudence.

• The DOL could programmatically file amicus briefs consistent with the Executive Order. Such briefs could, for example, urge courts to view alternative investments without any special skepticism, notwithstanding any additional or enhanced risks.

• A more ambitious approach would involve promulgating a safe harbor through a new regulation. ERISA contains no express authority for such a regulation, however. Thus, any such regulation would seem ripe for challenge, particularly in light of the Supreme Court’s decision in Loper Bright, which held that federal courts do not defer to agency interpretations of the law.

“Whether the Executive Order will spur Congress to effect conforming statutory changes to ERISA is unknown.”

Faegre Drinker Biddle & Reath LLP, Aug. 11: Presidential Order Instructs Regulators to Help Facilitate 401(k) Access to Alternative Asset Investments, Including Private Equity and Private Credit

Conclusion: “The executive order marks a significant milestone in the effort to democratize access to private markets. However, while it sets a clear policy direction, it leaves many details to the regulators. The DOL has until early February 2026 to reevaluate and clarify its positions on the fiduciary considerations associated with asset allocation funds that invest in alternative assets. More formal rulemaking, which would likely be more effective, would take longer to finalize. For the SEC, the exact scope and subject matter of any forthcoming guidance is somewhat harder to predict, but the agency has the opportunity to revisit a number of provisions that would help support the policy goals of the executive order, including by helping to broaden the types of investment funds that can be used as ‘access vehicles’ for plans desiring professional managed exposure to private markets and other alternative assets.”

Sidley Austin LLP, Aug. 8: Alternative Assets – the Next 401(k) Plan Investment?

Quotable: “The Order requires regulatory action, which will take some time. It seeks to retain the key role of a fiduciary in making decisions relating to the inclusion of a defined set of alternative asset investments, which does not include all private funds or opportunities but does include private equity, private credit, real estate, and digital assets. Guidance and clarification by regulators of the duties owed by fiduciaries in this context and possible safe harbors will be welcome.”

Take Two: “However, while the Order directs regulators to ‘prioritize actions that may curb ERISA litigation that constrains fiduciaries’ ability to apply their best judgment in offering investment opportunities to relevant plan participants,’ ultimately Congressional action may be necessary on this point.”