Opening 401(k)s to Private Equity, Crypto Tests New Safe Harbor

Benefits attorneys and retirement plan sponsors are rushing to unpack a new proposal from the Department of Labor that outlines a legal safe harbor for fiduciaries to offer more alternative investment assets in 401(k)s.

The 164-page proposed rule would provide legal cover for fiduciaries who thoroughly consider six factors before adding private equity, cryptocurrency, and other non-traditional assets to plan menus.

Employers and benefits attorneys see this as the latest effort from President Donald Trump’s DOL to curb what it has decried as frivolous and excessive litigation, while making it easier for more Wall Street firms to tap the $14 trillion retirement investment market.

Attorneys said the regulation will face scrutiny during a 60-day comment period as the administration seeks to finalize the rule before the end of the year.

Kevin Walsh, a principal at Groom Law Group, said the DOL is attempting to “hit that Goldilocks zone” with the rule, providing enough certainty for plan fiduciaries to offer more alternative investment products without being so prescriptive they could be easily sued for minor violations.

“I would expect a lot of comments to say, ‘This porridge is too hot or it’s too cold’ as the DOL tries to make sure this is that right temperature in the middle,” Walsh said.

Under the DOL’s proposal, fiduciaries must take into account six factors when deciding whether to include alternative assets in a retirement plan menu: Performance, fees, liquidity, valuation, performance benchmarks, and complexity.

Evaluating alternative assets through this framework would be new to many 401(k) plan sponsors who have avoided going beyond stocks and bonds in plans due to risk of lawsuits under the Employee Retirement Income Security Act.

The DOL estimated that among the roughly 721,000 plans affected by the proposed rule there would be 51,307 instances each year where target date funds with alternative investments are added to plan menus. The plans would have approximately $178 billion and 4.5 million participants annually flowing into these TDFs, the DOL projected.

Six-Factor Test

Mark Boyko, a partner at Bailey & Glasser LLP who represents plan participants, questioned how a fiduciary would come up with the “meaningful benchmark” the proposal demands when evaluating the integration of a digital asset like cryptocurrency into a 401(k) lineup.

“Why if you are an ‘America-First’ administration would you want to encourage investments to move from being in US dollars to being in any alternative currency?” Boyko said.

Erin Cho, who leads Mayer Brown’s ERISA fiduciary practice, said the department’s proposal provides more clarity on the meaningful benchmark standard. The proposal states that “there may be more than one meaningful benchmark for a designated investment alternative, however no single benchmark is a meaningful benchmark for all designated investment alternatives on a plan investment menu.”

Cho said the industry will need to watch Anderson v. Intel Corp. Inv. Policy Comm. at the US Supreme Court, which centers on the meaningful benchmark standard. In that case, a plan fiduciary committee adopted multi-asset class funds that included an allocation toward private market assets, prompting workers to allege violation of the duty of prudence.

Another potential area of focus for attorneys and plan fiduciary clients is the proposal’s references to an investment adviser who may be needed to provide analysis on certain unfamiliar asset classes to satisfy the complexity requirement.

“The takeaway should not be that using an investment adviser is a per se requirement under ERISA, as some fiduciary committees have members who are very familiar with a wide array of asset classes, including private market or annuity products,” Cho said.

Richard Shea, senior counsel at Covington & Burling LLP, said the inclusion of six non-exhaustive factors could create more openings for plaintiffs to bring lawsuits if they feel a fiduciary didn’t satisfy every requirement.

“On the one hand, it’s very helpful to have a list of factors both to the courts, and the fiduciaries, and the plan sponsors to address these issues,” Shea said. “But there’s a question, does this give plaintiffs more bullets to shoot at the fiduciaries?”

Addressing ‘Fear’ of Litigation

Dan Aronowitz, who heads Employee Benefits Security Administration at DOL, said a major purpose of the proposal is to address “the fear of diversifying an investment portfolio.”

He said the agency had removed a key regulatory burden by rescinding Biden administration guidance that cautioned against the inclusion of private-market investments in retirement plans.

“We don’t know if it will deter plaintiffs and actions, but courts should take notice that we have reaffirmed 52 years of departmental guidance that ERISA is a law of process in which fiduciaries deserve discretion, and judgment, and flexibility, and that they should be given maximum deference,” Aronowitz said on a call with reporters. “So do we hope that it makes a change in what we see as litigation abuse.”

Employer groups embraced the proposal for remaining asset-neutral and instead focusing on a process-based interpretation of ERISA for plan managers.

Andy Banducci, senior vice president of retirement and compensation policy at the ERISA Industry Committee, which represents employers, called the proposal a “meaningful and important step” to provide clarity.

“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,” Banducci said.

Critics of the proposal have pointed to higher fees, liquidity concerns, and less transparency in disclosures around private equity and private credit.

The Private Equity Stakeholder Project slammed the proposal as a “bailout” for the private equity and private credit industries at a time when they are facing a spike in investors seeking to withdraw money.

“Unlike the 2008 bank bailout, this one instead is bailing out private equity and private credit with yours and my retirement savings,” said Jim Baker, the group’s executive director.