Prudent Evaluation, Accredited Investors, Curbing ERISA Litigation

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.”

Additional Resources

• Vedder Price, Aug. 19: President Trump Signs Executive Order Seeking to Facilitate 401(k) Access to Private Funds and Digital Assets

• ArentFox Schiff, Aug. 18: EO Seeks to Expand Access to Alternative Asset Investments in Retirement Plans

• Seyfarth Shaw LLP, Aug. 15: Executive Order Opens the Door to Alternative Assets in 401(k) Plans

• Ballard Spahr, Aug. 14: Executive Order Seeks to Expand Access to Crypto and Private Investments in Defined-Contribution Plans

• Arnold & Porter, Aug. 12: Administration Announces Long-Awaited Order on Alternative Assets in 401(k) Plans

• Morgan Lewis, Aug. 8: Crypto, Private Equity, and Real Estate in Your 401(k)? Latest Executive Order Could Redefine Retirement Investing

SEE ALSO:

• DOL, Industry Leaders React to Trump’s EO Signing on Private 401(k) Funds
• DOL Rescinds Biden-Era Guidance Discouraging Use of Alts in 401(k)s
• Trump: Regulatory Overreach, Opportunistic Lawsuits Have Stifled Investment Innovation