401(k) Sponsors Want Holdover Alternative Investments Guidance

The US Labor Department is under mounting pressure to issue interim guidance for workplace 401(k) plans after President Donald Trump instructed regulators to clear the way for alternative funds’ inclusion.

Stop-gap sub-regulatory guidance could temper misgivings plan sponsors have about investments such as private equity and cryptocurrency making their way into retirement plans and creating lawsuit risk, retirement industry groups say.

Success or failure for alternative 401(k)s hinges on risk-averse plan sponsors that can be held personally liable if investments they offer their workers fail to meet strict fiduciary standards under the Employee Retirement Income Security Act.

“Uncertainty and ambiguity can chill consideration of such assets while also incentivizing unnecessary litigation,” said Gregory Hoff, assistant general counsel and director of labor and employment law and policy at the HR Policy Association.

The private-equity industry wants an immediate return on the nearly decade-long investment it made lobbying Trump for access to the $12 trillion 401(k) market.

Legal carve outs and rule changes can’t come fast enough to capitalize on deals major plan providers have signed with private firms and cryptocurrency exchanges.

Recordkeepers like Empower have tapped firms like Apollo Global Management Inc. and Franklin Templeton to deliver alternative assets to their 401(k) plan clients.

Timely Guidance

HRPA, along with the American Retirement Association, Financial Services Institute, and National Association of Professional Employer Organizations, called on the DOL’s Employee Benefits Security Administration to go public with its views on alternative investments following Trump’s August executive order calling for their inclusion in 401(k)s.

All four industry groups asked EBSA to issue immediate, actionable guidance that would make more investments off the public market available now.

They pointed to the declining number of public companies and the fact the classic, defined-benefit pension plans already have ready access to alternative investing strategies that promise to offer better returns and hedge against fluctuations in the stocks and bond markets in which 401(k)s currently almost exclusively invest.

“By issuing timely guidance, the Department can reduce the legal uncertainty that fosters litigation, thereby empowering fiduciaries to exercise their best judgment with regard to funds that include alternative assets,” the organizations wrote.

The DOL did not provide comment on the groups’ requests.

Interim guidance would fill the gap as EBSA rushes to comply with Trump’s 180-day timeline to issue a more permanent notice-and-comment rulemaking. The rule is expected to take the form of a safe harbor that would lay out a process plan fiduciaries could take to adopt alternatives without risking litigation from participants and beneficiaries or enforcement from federal investigators.

A handful of Republican senators have already asked EBSA to engage in notice-and-comment rulemaking “expeditiously.”

Trump’s executive order also called on the US Securities and Exchange Commission to review conditions it sets on private-equity assets. The US Treasury Department and IRS may need to write Labor Department fiduciary modifications into the tax code.

Not Enough

But short-term guidance may not be enough to discourage the plaintiffs’ bar from taking on employers that adopt alternatives without stiffer regulatory safeguards, said Rachel Faye Smith, co-chair of the executive compensation and benefits practice at Morrison & Foerster LLP in Boston.

Benefits attorneys look to interpretive guidance when it’s additive, Smith said. The DOL uses it to take a position or make an argument that isn’t clear in existing regulations.

But plan sponsors that run the risk of litigation by embracing private equity or cryptocurrency in the interim will likely face allegations that they breached their fiduciary duties under ERISA, by adding funds that weren’t “prudent,” which is a functional test that’s open to interpretation only based on the facts and circumstances in an individual case.

“Short of regulators issuing guidance saying you can’t be challenged on adding alternative investments, from a fiduciary risk perspective, this does very little,” Smith said.

Employer sponsored retirement plans frequently face litigation from participants and plaintiffs’ firms over alleged fiduciary breaches tied to factors from high plan fees to illegal forfeitures and poor-performing investments.

Fiduciary lawsuits over selection of alternative investments so far have been rare, given these assets’ historic absence from 401(k)s. But at least one recent case provides reason for employers interested in their inclusion to be hopeful.

Plan sponsors caught a break in May when the US Court of Appeals for the Ninth Circuit dismissed a participant lawsuit against Intel Corp. that alleged fiduciary violations for balancing its stock- and bond-heavy pooled investment funds with private-equity investments.

“Fiduciaries who go ahead after doing their homework with expert advisers will have good defenses to any lawsuits,” said Carol Buckmann, founding partner at Cohen & Buckmann PC.