DOL Floats 401(k) Rule to Allow More Private Equity in Plans (1)

The US Labor Department published the details of a long-awaited proposal aimed at making it easier to include nontraditional investments like private equity and cryptocurrency in workers’ 401(k)s.

The DOL posted an initial version of the rule Monday that would establish a legal safe harbor for fiduciaries to allow alternative assets on retirement plan menus, if they thoroughly consider six non-exhaustive factors to establish they’ve met their duty of prudence under the Employee Retirement Income Security Act.

The proposal, if finalized, could open up a retirement investment market worth nearly $14 trillion to more Wall Street firms by mitigating legal risks that have discouraged employers that sponsor retirement plans from integrating alternative assets.

The six factors fiduciaries must take into account are performance, fees, liquidity, valuation, performance benchmarks, and complexity. DOL said it determined the six factors based on relevant case law, existing regulations, and stakeholder input.

“Our rule clearly spells out that managers must evaluate any and all potential product offerings by following a prudent process,” Deputy Secretary of Labor Keith Sonderling said in a statement. “This proposal is decidedly neutral and refrains from saying that any asset class is any better or worse than other investment types, as the law requires.”

President Donald Trump signed an executive order in August urging more use of alternative assets in employer-sponsored retirement plans, and instructed the DOL’s Employee Benefits Security Administration to re-examine existing regulations on the issue.

Days later, EBSA rescinded Biden-era guidance that cautioned retirement plans against private-market investments due to valuation risks, illiquidity, and lack of transparency.

The new proposal spent roughly two months under White House review at the Office of Information and Regulatory Affairs. Top Treasury Department and Securities and Exchanges Commission officials touted it Monday as a step toward allowing millions of Americans to diversify their retirement investments.

“This proposed rule is an initial step in implementing the President’s Executive Order in a safe and smart manner, broadening access to additional retirement plan options for millions of Americans while being mindful of the importance of protecting retirement assets,” Treasury Secretary Scott Bessent said in a statement.

Alternative assets referenced in Trump’s order included private market investments, interest in real estate, commodities, digital assets, projects financing infrastructure, and lifetime income options.

Asset Diversification

Advocates of the proposal have argued it would allow workers access to private markets previously only available to the wealthy, and could diversify portfolios.

Bryan Corbett, president of the Managed Funds Association (MFA), which represents the global alternative asset management industry, praised the proposal in a statement for “taking steps to give more Americans the choice to access alternative investments with robust investor protections.”

Retirement plan administrators have already begun teaming up with firms like Blackstone Inc, Franklin Templeton, and Apollo Global Management to offer plans alternative asset options.

Critics of opening up retirement accounts to private equity and other alternative assets have cited higher fees, less transparency, and issues with liquidity associated with those investment classes. Groups like the Private Equity Stakeholder Project have also pointed to the recent scramble among investors in the private credit market seeking to get their money out.

“At a minimum, the Department of Labor should hold private equity to the same disclosure and transparency standards expected of publicly-traded stocks, mutual funds, and ETFs,” PESP Executive Director Jim Baker said in a statement, citing reporting on fees and expenses and how investments are performing compared to stocks.

Much of the success of Trump’s executive order hinges on employers’ appetite to allow private-market assets into retirement portfolios alongside the traditional stocks and bonds that have long been 401(k) staples.

Employers that sponsor retirement plans currently face strict fiduciary liability and a high potential for lawsuits if workers’ retirement accounts face high fees or suffer significant losses.

A safe harbor under federal benefits law for employers incorporating these investments could help alleviate risk.

There will be a 60-day public comment period for input on the new DOL proposal once it is published on the Federal Register.