The Real Reason DOL Is Clearing the Way for Alts in 401(k)s

"To me, it's less about alternatives — although alternatives are certainly a key part of this," Campbell said on the webcast. "It's really more about trying to establish a safe harbor that's going to let fiduciaries know or have better evidence to sustain earlier actions in litigation, say on motions to dismiss. And really try to change the dynamic we're seeing in the ERISA litigation space."

Josh Waldbeser, partner in Faegre Drinker's Chicago office, agreed on the webcast that "the reference to alternatives in the title [of the plan] is not a reference to alternative asset classes per se — private equity, crypto, hedge funds — it's a reference to investment options made available in 401(k) and other participant-directed plans."

The regulation "is a collection of a lot of well-established principles that have been raised by DOL and case law in the past," Waldbeser continued, and "it is really designed to give fiduciaries additional comfort and clarity around what they should be doing when they're picking the investment options for 401(k) plans."

Labor's plan "is neither endorsing nor discouraging any asset class or any investment — whether alternative or otherwise," Waldbeser continued. "The principles that they [Labor] set forth are applicable to registered funds, mutual funds, CITs, private funds, anything that might be used, either directly or indirectly, to facilitate access to investments for defined contribution plan participants."

Aronowitz Weighs In

Daniel Aronowitz, assistant secretary of Labor for the Employee Benefits Security Administration, noted in mid-April that Labor's alts-in-401(k)s plan is meant to guard against frivolous ERISA lawsuits.

Aronowitz, speaking at the National Association of Plan Advisors' 401(k) Summit in Tampa, Florida, said "a growing wave of frivolous ERISA lawsuits" are harming the retirement system, according to 401(k) Specialist, a publication covering the retirement market.

"Hundreds of excessive fee and performance malpractice cases have been filed against American plan fiduciaries in the last 15 years by an enterprising and ever-growing ERISA plaintiffs bar," Aronowitz was quoted as saying. "The private retirement system has been swamped with lawsuits challenging fee and investment decisions, with over half of jumbo plans sued in the last 10 years — litigation that has almost exclusively benefited plaintiff lawyers who have secured well over $500 million in fees in these cases whereas most plan participants take home only a token $25 to $100. This is a scam."

What the Plan Covers

The proposed rule "covers more than just private equity and private credit," Mark Iwry, a former senior advisor to the Treasury secretary on retirement policy who's now a nonresident senior fellow at the Brookings Institution, told me in an email.

"Consistent with the executive order that prompted it, the rule sweeps in other alternative asset classes, such as real estate, infrastructure and commodities, as potential DC plan fund alternatives," Iwry said. "Like the EO, the proposed rule also refers to digital assets such as cryptocurrency, as well as the traditionally distinct category of retirement income. While the EO is widely viewed as driven by pressure to open 401(k)s to PE, PC and crypto, that initiative might gain a bit of political cover by broader reference to the other investment categories, especially retirement income."

Comments and Next Steps

Labor is taking comments on its plan until June 1; close to 12,000 people have weighed in.

"There will be a lot of comments, including those objecting to the inclusion of alternatives," Waldbeser said.

"The No. 1 thing for every plan fiduciary is to review and amend their investment policy statement, and possibly the plan document," Campbell added.

While an IPS is not required by ERISA, "most plans that work with an advisor are going to adopt an investment policy statement because it is the blueprint that shows your prudent process," Campbell continued.

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," according to Labor.

"These six factors and the associated principles behind them are not new, different or novel," Campbell relayed. "These are long-established fiduciary principles and in one respect plans are already abiding by these. But what they probably are not doing is documenting how they've considered them in the way that will match what the final safe harbor will look like."

Fred Reish, of counsel with the Ferenczy Benefits Law Center, said in a LinkedIn post that he's "worried that advisors are not aware of what the new proposed regulation says. For example, it says that advisors and fiduciaries should consider a reasonable number of investment options before selecting one in the particular category. Examples suggest that means 3 to 5 options. How many plans consider 3 to 5 target date suites before selecting one? Not many I suspect."

Both Campbell and Waldbeser agreed that Labor's proposed plan, if finalized in its current form, is unlikely to change in the next administration. "I'm fairly bullish it will stand the test of time," Waldbeser said.