401(k) Alternative Investment Critiques Gloss Over Key Details

Critics of alternative investments often cite high fees, valuation concerns, the lack of exits for private equity portfolio companies, and instability in the private credit market as reasons these investments are unsuitable for defined contribution retirement plans. But these generalized critiques overlook how alternative investments are offered in DC plans today, and the specific manner through which President Donald Trump’s August executive order encouraged federal agencies to expand access to these products: target-date and other asset allocation funds.

The critiques also gloss over that plan fiduciaries—not the Department of Labor—decide which investments and asset classes to offer in their plans. The Employee Retirement Income Security Act of 1974—the federal law governing most private sector retirement plans—was designed to ensure that retirement plan fiduciaries make prudent decisions that are in the best interests of the participants in their plans.

ERISA is fundamentally about process and reasoned decision-making. The law doesn’t favor or disfavor particular investments or asset classes. It doesn’t authorize the DOL to make binding pronouncements about the propriety or suitability of different asset classes.

In the DOL’s own words, its role is to take “a neutral approach to particular investment types and strategies.” ERISA and the DOL provide the guardrails for making prudent investment decisions—they don’t make the decisions for plan fiduciaries.

Private markets and alternative investments aren’t new to DC plans. Real estate investments, for example, have played a significant role in DC plan investments for nearly two decades, demonstrating that alternative assets can help participants diversify their investment portfolios over long time horizons and achieve successful retirement outcomes.

Private market assets are also typically included in a modest sleeve within target-date funds or professionally managed accounts built by managers who price daily, respect fee sensitivities, and manage liquidity through diversified holdings and cashflow management.

So why have alternative investments in DC plans received so much attention lately? One reason is that DC plan sponsors and their fiduciaries have faced an ongoing and relentless wave of class actions challenging well-performing plan investments (including the most popular and sophisticated target-date funds) using hindsight-based performance data and comparisons with inappropriate benchmarks and funds with different strategies. With DC plans the target of nearly 100 lawsuits in 2025 alone, plan fiduciaries have good reason to worry about becoming the next defendant, regardless of their investment decisions’ merits.

This heightened focus on litigation risk predictably leads plan fiduciaries to de-risk their plans through simplification—potentially resulting in less diversification, smaller investment returns, and lower balances for their participants.

For years, plan sponsors have been seeking regulatory clarity and guidance on how to evaluate plan investments to help insulate them from being second-guessed in court. With the current focus on alternative investments and plaintiffs’ lawyers already threatening to file hypothetical lawsuits over alternative investments in DC plans, regulatory clarity is especially important.

Trump’s executive order instructed the DOL and the Securities and Exchange Commission to work together on issuing rulemaking and other guidance to help DC plan fiduciaries comply with their fiduciary duties of prudence and loyalty when evaluating alternative investments. Both agencies have been engaged in that process, and the DOL recently announced a forthcoming proposed rule. We expect this proposed rule to provide a long-awaited framework to help plan fiduciaries comply with their fiduciary obligations when evaluating their plan investments, including alternative investments.

Existing structural constraints already protect individual investors. DC participants aren’t making direct, illiquid investments into stand-alone privately offered funds. The SEC and its staff have a decades-long line of guidance dictating how private funds offered under an exception to the Investment Company Act of 1940, as amended, such as Sections 3(c)(7) or 3(c)(1), need to be structured when made available to DC plans so that the plan—and not the individual plan participant, who may not qualify as a qualified purchaser or an accredited investor—is considered to be the investor in the fund.

As a starting point, the private fund can’t constitute more than 50% of a fund or managed account available for direct investment by plan participants, otherwise a “look through” will generally be required. As a result, DC plan participants obtain limited exposure to private markets through institutional-grade vehicles that are overseen by investment professionals and reviewed by their plan fiduciaries.

Neither the executive order nor the DOL’s proposed rule mandates the inclusion of alternative investments in DC plans. They instead aim to provide a framework and an expansion of choice for fiduciaries to evaluate whether certain alternative investments—when offered in a target-date or asset allocation funds—are prudent and in the best interests of their participants.

ERISA’s fiduciary obligations haven’t changed. When a plan fiduciary lacks the expertise to evaluate a plan investment, they must seek the advice of a professional and document their fiduciary process. The executive order and the DOL’s proposed rule won’t give plan fiduciaries a free pass to offer alternative investments without complying with their fiduciary obligations.

For that reason, blanket assertions that offering alternative investments in DC plans will harm retirement savers obscure how DC plans operate. If we continue to follow ERISA’s fiduciary requirements, alternative investments can help DC participants achieve greater investment returns through expanded investment opportunities without compromising participant protections.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Erin K. Cho is a partner in Mayer Brown’s Washington, DC, office where she leads the firm’s ERISA fiduciary practice.

Richard E. Nowak is a co-chair of Mayer Brown’s ERISA litigation practice.

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