Plaintiffs’ Bar Pledges to Challenge Private Equity in 401(k)s

Attorneys who represent workers and retirees in lawsuits against employer benefit plans are cautiously optimistic that the Trump administration’s new effort to quash litigation challenging alternative investments in 401(k)s won’t succeed.

Members of the plaintiffs’ bar believe the Employee Retirement Income Security Act, which guarantees participants and beneficiaries a private right of action, will preempt federal agency guidance—even an ERISA safe harbor Trump hinted at in his recent 401(k) alternative investment executive order.

Trump’s sanctioning of unconventional assets such as private equity and cryptocurrencies in employer-sponsored plans signals a categorical shift in ERISA enforcement. Plaintiffs’ attorneys are beginning to view themselves as a last line of defense, while retirement plans see alternative investments as a unique opportunity to rein in excessive ERISA litigation.

Trump’s Aug. 7 order told the US Labor Department to prioritize actions that would curb “frivolous” ERISA litigation, which has stirred resentment among retirement plans since a Covid-19 pandemic high point. Retirement plans and the groups that represent them want Trump to make it harder for the plaintiffs’ bar to sue for violating the strict fiduciary standards they’re bound to under federal benefits law.

“There’s no question that this administration and the people it has put in at the DOL would like to make it more difficult for employees to protect the rights that are given to them under ERISA,” said Mark Boyko, a partner at Bailey & Glasser LLP who represents plan participants alleging fiduciary breaches. “But, look, the DOL can’t create a regulation that runs contrary to ERISA.”

After spiking to more than 100 federal lawsuits in 2020 alleging retirement plans violated their fiduciary duties by forcing workers to pay excessive fees or failed to discard poorly performing funds, the average number of class actions has remained elevated.

“We were very happy to see that litigation was tackled head-on in the executive order and to see the administration really acknowledge that fiduciary litigation has been one of the deterrents of private assets being adopted under the current framework,” said Holly Verdeyen, US defined-contribution business leader at the Mercer consulting firm.

Private-sector litigation is a feature of ERISA, not a bug, said Jerry Schlichter, founding and managing partner of Schlichter Bogard LLC, which has pioneered developments in ERISA litigation. The law divides responsibility for enforcement between the DOL and the plaintiffs’ bar in order to adequately regulate the millions of benefit plans nationwide, he said.

Trump’s executive order and the DOL’s more recent efforts to green light alternative 401(k) assets mean plaintiffs’ attorneys will have to go it alone to defend against the risks those assets pose to investors’ life savings.

“Private equity advocates say this is a wonderful investment, that it’s going to democratize investing for the little guy,” Schlichter said. “If it’s so safe and it’s definitely going to lead to a better retirement for all, then why do they need a safe harbor or litigation reform to make it work?”

Tall Order

Trump’s order leaves the DOL and other agencies with a regulatory dilemma. Officials have to craft a safe harbor that’s broad enough to cover the half dozen alternative asset classes the president approved while ensuring the language is narrowly tailored and “calibrated” enough to pass muster in an ERISA or Administrative Procedure Act review.

“This is a big part of the struggle, maybe the biggest,” said Matthew Calloway, a principal in Mercer’s law and policy group. “One of the key factors here is that ERISA enables participants to bring private rights of action to enforce ERISA’s rules. DOL also has the authority to litigate, but they have much more limited authority to regulate when plaintiffs can sue.”

There is some precedent to legal carve outs for individual investments. Congress granted fiduciaries a statutory safe harbor for annuity selections under the SECURE 2.0 Act in 2022, but annuities weren’t new entrants to the 401(k) space, and a regulatory safe harbor already existed.

Retirement plans have almost always been exclusively invested in stocks and bonds. There’s never been an outright ban on alternative asset classes, but the risks associated with illiquidity and a lack of transparency, combined with the threat of litigation, have steered fiduciaries away.

Trump’s order sought to address the administrative barriers to alternative 401(k)s and hinted at blocking litigation, but that’s a tall order, said Jeff Hahn, a civil litigation partner at Stris & Maher LLP and former DOL attorney.

“There inevitably will be litigation around whether the safe harbor applies or is satisfied under the facts of a given case,” Hahn said.

What’s more, courts asked to weigh a clear right of action under ERISA against agency regulations need no longer defer to agencies’ statutory interpretations where the law is ambiguous or silent, following the US Supreme Court’s 2024 Loper Bright Enterprises v. Raimondo decision.

With that in mind, the plaintiffs’ bar has reason to be optimistic as ERISA is clearly on their side, Boyko said.

“I don’t think this executive order is going to move the needle much,” he said. “I would joke and say that I hope employers add alternative investments, because I have some kids I need to put through college.”