Employers to Tread Carefully With DOL 401(k) Private Asset Push

Employers and their attorneys are responding cautiously to a Department of Labor proposal pitched as a golden opportunity to diversify 401(k) plan menus by easing the addition of private equity and other alternative assets.

The proposed rule from the Employee Benefits Security Administration, once finalized, would create a legal safe harbor for fiduciaries who include alternative investments like cryptocurrency, private equity, and real estate.

The DOL’s proposal included optimistic projections about the uptake of alternatives in plans moving forward, and the White House has framed the regulation as a way to give workers access to options previously available only to wealthy investors. But the impact of the rule will depend largely on employers’ comfort with more complex and opaque assets.

“Plan sponsors that I’m speaking with do not seem to be beating down the door to get there first,” said Christian Hancey, a partner in Nixon Peabody’s employee benefits and executive compensation group. “With respect to new products that include alternative asset classes, I’m hearing a degree of caution in these early conversations.”

Retirement plan administrators like Empower have already announced partnerships with private investment firms like Blackstone Inc., Apollo Global Management Inc., and Franklin Templeton to offer private market investments in defined contribution plans.

Employers will be looking to investment advisers to gauge their level of comfort with new products as they enter the marketplace, Hancey said. Those products are likely to have different fee structures, liquidity constraints, and other features compared to traditional mutual funds, he said.

“I would advise caution about not being a potential test case if a plaintiff’s firm wants to test the regulations and the degree of deference that they will be given by a court,” he said.

Employer Considerations

Employer groups welcomed the March 30 proposal as a step toward clarity for sponsors reluctant to expand investment options beyond traditional stocks and bonds for fear of fiduciary lawsuits under the Employee Retirement Income Security Act.

“Too often, fear of meritless litigation reduces innovation in 401(k) investment offerings,” said Andy Banducci, senior vice president of retirement and compensation policy at the ERISA Industry Committee.

Lynn Dudley, senior vice president for global retirement and compensation policy at the American Benefits Council, praised EBSA for a “pro-ERISA” proposal that did not favor any asset over another. Members have responded positively, she said, but fiduciaries are likely to wait and see on adoption.

“It’s not a case of they’re just going to say, ‘Hey guys, we’ve got a great new investment for our plan and everybody ought to jump in with two feet,’” Dudley said.

Employers may also be reluctant to engage at a time when private credit is grappling with a rise in investors seeking to withdraw money.

One of the six factors fiduciaries will have to satisfy to meet the safe harbor is having the knowledge to understand the complexity of an alternative. That may be harder for smaller employers that do not have heavily managed plans, a far cry from defined benefit pensions that currently invest in private assets.

The complexity adds additional risk for fiduciaries, Hancey said, because it may be difficult to communicate the unique attributes of an alternative to plan participants. Savers’ interest level can also drive uptake.

In its proposal, the DOL estimated using public surveys and data projections that of roughly 721,000 retirement plans affected by the rule, there would be about 51,000 instances annually of target date series with alternative investments being added to plan menus.

A September BlackRock Inc. survey found 24% of plan sponsors were considering adding alternatives to their plans, with target date funds as the top vehicle for doing so. A 2025 listening tour conducted by financial services group TIAA found 83% of sponsors were interested, but most needed more information about risks.

Investment Vehicles

Employers interested in adding an alternative asset into their retirement plans would likely either add a small allocation within a target date fund, or utilize a collective investment trust that contains ERISA-covered plans, according to benefits attorneys.

A June 2020 DOL information letter approved inclusion of private equity in a CIT or other pooled vehicle with a liquidity component, or in a separately managed account overseen by a qualified investment manager.

The DOL in its new proposal said it “seeks information on what types of vehicles plans would use to offer alternatives.” The department said it anticipated target date funds would be the main choice.

Ruth Delaney, a partner at K&L Gates, said including alternatives in a TDF allows employers to introduce newer investment options via “a product that is already familiar” to workers and fiduciaries.

“There are paths for other investment vehicles, but for the managers of some of those other vehicles, they may need to try to tailor some of their policies and procedures or some of their offering materials to the factors that are in the rule proposal,” Delaney said.

The Managed Funds Association, which represents alternative asset managers, said each type of alternative asset covered in the DOL safe harbor will be viewed differently by sponsors based on factors like liquidity and volatility.

“Alternatives would likely be a limited sleeve within a diversified portfolio alongside public equities and bonds, with managers retaining flexibility to set the mix consistent with their strategy,” Jennifer Han, MFA’s chief legal officer, said in a statement.

Jeffrey Ross, chair of the executive compensation & ERISA Department at Fried, Frank, Harris, Shriver & Jacobson, said fiduciaries should be free to add alternatives to plan menus if they think it’s in participants’ best interest, but expressed skepticism many would move quickly.

“People are worried about litigation risks because they know that if something blows up, there’s going to be a lawsuit and they’re going to have to deal with it,” Ross said. “And so I don’t see this representing a monumental shift. I think people are going to move towards alternative assets in 401(k) plans carefully and glacially.”