Labor Department Examples Fuel 401(k) Private Asset Rule Debate

The US Department of Labor’s contentious use of examples in its proposal to make it easier to include assets such as cryptocurrency and private equity in retirement plans highlights the tightrope the agency is walking in crafting the new regulation.

Several retirement industry groups, in letters submitted before the June 1 public comment period closed, urged the DOL to tweak its use of examples in the final rule, expected to be published before the end of the year. Many organizations suggested the department make more clear that the examples were merely meant to be “illustrative” to avoid giving the impression the examples are the only acceptable way for fiduciaries to satisfy the required six factors.

The department provided multiple examples under each of the six factors included in the March 30 proposal, offering detailed scenarios of how a fiduciary might operate to ensure they have met the requirements for a legal safe harbor under the Employee Retirement Income Security Act. The six factors are performance, fees, liquidity, valuation, benchmarks, and complexity. Meeting them would provide legal cover for fiduciaries to add non-traditional assets to plans.

“What’s notable isn’t that the department used examples, rather it’s how central they are,” said Anya Coverman, president and CEO of the Institute for Portfolio Alternatives, which represents distributors of alternative investments. “This proposal builds its safe harbor around illustrative examples in the regulatory text itself, and that tells you the department understands the real problem: that fiduciaries don’t avoid these asset classes because the law forbids them, they avoid them because nobody has shown them what a defensible process looks like.”

The agency is seeking to offer fiduciaries comfort and protection in adding alternative assets to 401(k) menus while also crafting a final rule that can stand up to administrative scrutiny in court. The proposal has drawn pushback from Democratic attorneys general and some former Labor Department officials who have argued it will weaken protections for savers and expose them to risky investments. The proposal, if finalized, would make it easier for Wall Street firms to tap into the roughly $14 trillion retirement market and give 401(k) participants more access to private markets.

The department has provided examples in the past, often through sub-regulatory guidance, FAQs, and tip sheets to aid fiduciaries and clarify certain points in regulations. One major point of contention expressed in public comment letters is the placement of the examples, which in the proposal were included in the text of the regulation.

Example ‘Trade-Offs’

Groups like the Defined Contribution Alternatives Association, the Investment Company Institute, and the ERISA Industry Committee explicitly referenced the examples as part of their public comment letters, which expressed broad support for the regulation. Some organizations urged the department to move the examples to the preamble of the final rule, while others suggested issuing them in separate guidance.

There are “trade-offs” depending on where examples are included in the final version, said Elena Barone Chism, deputy general counsel for retirement policy at the institute, which represents the asset management industry.

If the examples remain in the text of the rule, Barone Chism said, they could be perceived as having more legal authority and could give fiduciaries greater comfort their actions would hold up in court if they follow the examples.

“On the flip side, there are concerns about having examples in the text of the rule because of potential negative inferences that could be drawn if a fiduciary follows a process that’s not covered in any particular example,” she said. “The process could then be misconstrued as being imprudent just because it’s not described.”

Examples in the regulatory text would also be harder to adjust if the market evolves or new products develop to deal with liquidity or other factors, she said.

ICI’s comment letter recommended moving the examples into the preamble, “or, at a minimum, clarifying that the examples are illustrative rather than prescriptive.”

The Institute for Portfolio Alternatives proposed eight new examples for the final regulation and suggested including them in the text of the rule would be most durable in assisting plan sponsors and fiduciaries.

Officials with industry groups said they expect the DOL to take feedback from the thousands of public comments into account in the final rule. Daniel Aronowitz, head of the Employee Benefits Security Administration, previously said he welcomed input to make the final product stronger.

“I think their intent was that these examples would be illustrative only, and I do expect them in the final regulation to make that even clearer,” said Erin Cho, who leads Mayer Brown’s ERISA fiduciary practice.

Legal Defenses

Benefits attorneys said any examples the DOL publishes upon finalizing the rule could play a role in future litigation around the regulation, targeting either retirement plans that include alternative assets or the department on administrative grounds.

Rick Nowak, co-chair of Mayer Brown’s ERISA litigation practice, said fiduciaries who add alternative assets to plan menus are looking for guidance in the face of a wave of class action lawsuits, many over fees or performance.

“Now they will have something to fall back on because the Department of Labor has looked at this closely,” Nowak said. “The fiduciaries can say we are acting consistent with the regulation and with the examples in the regulation.”

The Supreme Court’s 2024 Loper Bright ruling made it more necessary to establish a fact pattern of how a rule should apply, said Kevin Walsh, a principal at Groom Law Group and a member of the board of directors at the Defined Contribution Alternatives Association. That decision eliminated the Chevron doctrine requirement that judges defer to reasonable agency interpretations where the law was unclear.

“Here it seems like some of the examples are designed so that the courts understand the reasoning,” Walsh said. “That’s actually helpful for them in persuading a court that the underlying principle itself is valid because they’re trying to articulate a reasonable interpretation of what they are saying the law says.”