Reducing Liability Exposure, Core Fiduciary Obligations

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