Employers Seek Safe Harbor as DOL Wraps Private Asset Proposal

Employers and benefits attorneys are eagerly anticipating an imminent proposal from the Department of Labor on alternative assets in 401(k)s as the regulation’s publication deadline draws near.

Plan sponsors expect the Employee Benefits Security Administration’s rulemaking, now under White House review, to address risks of integrating these assets into retirement plans, with the inclusion of a safe harbor for fiduciaries still seen as the likeliest outcome.

The proposal will lay the foundation for a rule that, if finalized, would help open the roughly $12 trillion 401(k) market to more non-traditional assets. Defined contribution plans are typically invested in stocks and bonds, with alternatives like private equity and cryptocurrency deemed higher risk because of concerns around liquidity, transparency, and fees.

“What we’re looking for is anything that can provide certainty to say, this is how you can do these things under a safe harbor in ERISA to shield yourself from a lot of this litigation that’s going on,” said Gregory Hoff, general counsel for the Chief Human Resource Officers Association.

The proposal is expected soon given the 180-day deadline outlined in President Donald Trump’s August executive order on adding alternative assets to 401(k)s.

EBSA must strike a balancing act, crafting a rule specific enough to provide meaningful guidance without being overly prescriptive and raising the risk of post-Chevron legal challenges, benefit attorneys said.

Deputy Secretary of Labor Keith Sonderling, speaking to the Securities Industry and Financial Markets Association Jan. 9 described implementing Trump’s order as the department’s “first and foremost priority.” He called for stakeholder and outside expert help to shape rulemaking.

Sonderling said DOL wants to address “each category that gives plan sponsors heartburn” and “not just be general” while following core Employee Retirement Income Security Act of 1974 principles.

Addressing Litigation Risk

ERISA doesn’t bar employers from integrating alternative assets into 401(k)s.

Recordkeepers like Empower have begun partnering with firms like Apollo Global Management Inc., Franklin Templeton, and Blackstone Inc. for offerings.

But ERISA does require a high standard of care from sponsors, a deterrent to adopting alternatives in the face of the plaintiffs’ bar.

Plan participants can sue employers for fiduciary breaches when funds underperform benchmarks, and can argue a sponsor acted imprudently by offering alternative assets if those investments falter.

Excessive fee suits are also growing, and could target fees for managing private assets, which are typically higher than those charged for index funds.

The new EBSA safe harbor could be broad or broken down by asset class. The executive order mentions private equity, real estate, commodities, projects financing infrastructure development, and digital assets.

“A safe harbor in any context is never a complete safety card, because you have to show that you complied with the safe harbor. But that is one way in which they could address the language in the executive order saying we want to try to avoid having people worry about getting sued in making decisions about whether or not to offer these kinds of investments,” said Lisa Gomez, who was head of EBSA during the Biden administration.

Critics’ Concerns

In addition to higher fees, critics of Trump’s EO criticize the inclusion of private equity in 401(k)s in particular due to a lack of transparency around funds, and uncertainty around valuation and liquidity of certain assets.

Jim Baker, the executive director of the Private Equity Stakeholder Project, said the group opposes any safe harbor for private equity, and that the DOL should ensure private equity firms are transparent about what they are investing in and what fees they’re charging.

The DOL proposal could address some of those concerns.

EBSA could outline principles to protect fiduciaries when evaluating fees by clearly stating they are not obligated to choose the lowest possible fee in every circumstance.

“Just because an investment may be harder to understand, or more expensive, or take longer to get out of does not mean it’s per se bad, but it’s all about educating, making sure the plan fiduciaries understand it and they have professionals helping them act in the interests of the plan,” Gomez said.

If the proposal is broken down by asset class, it could address some of the specific concerns around private equity in particular.

“If it’s intended to be more broadly applicable, it would be much less likely for it to specifically call out or apply specific provisions to the illiquidity concerns,” said Matthew Eickman, managing partner at the Fiduciary Law Center.

Employers Waiting

Andy Banducci, a senior vice president at the ERISA Industry Committee, said his group representing large employers wants DOL to consider “the durability” of the rule it proposes. That means using broader principles to accommodate new products or strategies that emerge in the future, he said.

“A good rule that gives more security to plan sponsors and fiduciaries could result in more companies giving serious consideration to these kinds of products,” he said.

The US Supreme Court’s 2024 elimination of the Chevron doctrine, in which judges had to defer to regulators where the law was silent, will also be on EBSA’s radar in drafting a proposal that can weather Administrative Procedure Act scrutiny.

“They do have pretty material constraints and limitations, and I think with Chevron and all of the more recent challenges to DOL rules, those rules are only as good as a court’s opinion of them,” said Michael Kreps, a principal at Groom Law Group.

Employers are also watching the high court for an appeal from two former employees of Intel Corp. who sued the company in part over its plan’s allocation of worker retirement money into private equity.

Christian Hancey, a partner at Nixon Peabody, said some employers will also be looking to see if other companies begin offering alternative assets as part of plan options, saying they may rather be a “quick follower” than an “early adopter.”

“No employer wants to be the test case to test the effectiveness of a new DOL safe harbor,” Hancey said.