"The [DOL's] proposed regulation on selecting designated investment alternatives ... reflects an effort by the DOL to bring greater structure and clarity to how fiduciary decisions are evaluated under ERISA. For plan committees and advisors, that shift creates a number of practical opportunities.... [1] A clearer playbook for fiduciary decisions ... [2] Stronger documentation and defensibility ... [3] More confidence to evaluate broader investments ... [4] Reduced pressure to default to lowest cost ... [5] Better alignment with participant outcomes." MORE >>
"The Proposed Rule does not by itself resolve all of the structural questions that private funds and other nonregistered products face in DC plans. It does, however, offer a clearer framework for fiduciaries' prudent process and highlights where the operational features of these products (particularly liquidity, valuation, benchmarking, fees, and complexity) may have to evolve. For managers and sponsors, the near-term focus is likely to be both on vehicles such as target date funds, balanced funds, and CITs and other delivery structures that can satisfy the Safe Harbor's expectations, and on targeted comments aimed at ensuring that the final rule can be applied to nonregistered structures on workable terms." MORE >>
"Although rooted in an executive order on alternative assets, the proposal addresses more than just alternative assets and outlines a new process-based safe harbor for fiduciary decision-making. This LawFlash outlines key themes and implications from the proposal." MORE >>
"[In] its pursuit of a fiduciary safe harbor, the DOL is making the following mistakes: [1] Applying the standards of very large companies, with their substantial resources, to the small and mid-market plan sponsors and their fiduciaries; [2] Giving examples that appear to be imposing mandatory rules, which is inconsistent with a principles-based standard -- the prudent person standard of ERISA." MORE >>
"[A]sset managers and private equity fund sponsors have launched a coordinated push to bring private equity, private credit, and other alternatives into participant-directed accounts.... It is, we are told, time to democratize access. What this framing tactfully omits is that the accredited investor standard, the prudent expert rule under ERISA, and the diversification and liquidity expectations baked into Section 404(a) exist for reasons.... Stripping those guardrails away is not democratization. It is the unilateral repeal of protection, sold to the people who lost it as a favor." MORE >>
"Plan committees should evaluate whether their current fiduciary process, including investment review and selection framework, generally aligns with the proposed six‑factor analysis, particularly with respect to the rationale documented in committee minutes. Plan fiduciaries should consider with their ERISA counsel and investment advisor what preparatory steps, if any, may be appropriate in anticipation of the proposed regulations being finalized, including with respect to fiduciary process, committee documentation, and investment policy statements." MORE >>
"Updating PTE 77-4 would better align the exemption with today's marketplace. It would give managers greater flexibility to offer plan participants diversified, professionally managed strategies -- including those with private market exposure -- within the familiar and well-understood ERISA compliance framework of PTE 77-4.... [E]xpanding the exemption ... would provide access to a broader range of investment options. More choice when paired with strong fiduciary oversight can support better diversification and long-term investment opportunities." MORE >>
"Retirement industry stakeholders appear split on the [DOL's] proposed safe harbor for alternative investments in defined contribution plans, with public comments revealing sharp divides over fees, risk, liquidity standards and fiduciary liability.... [I]ndividuals and organizations have weighed in during the public comment period, with some praising the regulatory clarity and others warning that the six-factor framework doesn't go far enough to protect plan sponsors or participants." MORE >>
"The Investment Selection Proposal, the [DOL's] recent proposal that provides a guide for a prudent fiduciary process, was initially envisioned as a way to facilitate greater access for alternative assets in 401(k) plans. What the DOL produced in March instead was an asset-neutral proposal that does not emphasize alts or private securities at all.... The proposal might instead be called the 'Litigation Mitigation Proposal.' " MORE >>
"In recent years, various stakeholders have expressed interest in expanding investment options in 401(k) plans to include alternative assets, such as private investments and digital assets. Proponents say that the benefits of incorporating these investments include the potential for higher investment returns and increased portfolio diversification. Opponents note the risky and speculative nature of these investments, the high and sometimes opaque nature of private equity fees, and concerns about the liquidity of these investments." MORE >>
"The [DOL's] recently proposed framework ... [is] a potential inflection point -- not because private market investments are suddenly appropriate for all retirement savers, but because clearer guardrails make it possible to think more constructively about how these options might be introduced responsibly. Key to that conversation is the role of the recordkeeping industry as a critical hub -- connecting employers, participants, and retirement plan advisors to the investment options available." MORE >>
"Many 401(k) plans need the opposite (liquidity), [Mr. Schlichter] argued, in case of a layoff, bankruptcy, medical emergency, and educational needs for children, calling private markets' structure an 'inherent contradiction' when compared with the average individual.... He rhetorically asked who's pushing for private market investments in 401(k) plans -- not AARP, the Pension Rights Center, or unions, 'it's private equity managers that want to tap into $6 trillion in 401(k)plans. There are no advocates for ordinary investors who are advocating for it.' " MORE >>
"[T]he safe harbor test does not completely eliminate a fiduciary’s risk if they include alternative investments in ERISA-governed plans. In addition to the possibility of lawsuits, fiduciaries must also navigate the higher fees commonly associated with alternative investments, as well as the liquidity and valuation challenges inherent in these assets." MORE >>
"In a May 8 letter ... Rep. Richard Neal (D-Mass.) requested that [GAO] examine, among other things, the '…benefits, risks, and challenges that retirement plans face in investing in private credit or offering it as an investment option ...' Rep. Neal explained that the recent push to encourage 401(k) plans to invest in private credit 'coincides with very concerning reports' of private credit funds blocking investors' redemption requests and being downgraded by debt-ratings agencies." MORE >>
"[T]his is the first time that the DOL has said that fiduciary responsibility for investment selection extends beyond the selection of individual investments and includes the selection of an appropriate lineup of investments for participant direction ... This provision, even though in a proposal, should be seen as reflecting the DOL's views on fiduciary responsibilities." MORE >>
"Although public pension systems operate under state-law fiduciary rules rather than the federal regulation this rule would amend, the structure it establishes matters: it is the most detailed federal description to date of what a prudent investment selection process looks like, and state courts evaluating public trustee conduct will inevitably use it as a reference." MORE >>
"In its current form, the rule's safe harbor rests on a broken fee disclosure framework for collective investment trusts holding private market assets, extends asset-neutral treatment to cryptocurrency without any participant protections, and creates robust legal protections for fiduciaries without corresponding transparency for participants. Each of these gaps undermines the rule's participant-protection potential and should be addressed in the final rule." MORE >>
"Two areas of the regulation raise questions that would benefit from additional guidance. First, does maximum discretion to choose investments mean that prudent fiduciaries could select an ESG fund, as the best fit for their plan participants' risk preferences? ... Second, what does it mean to establish an investment menu that allows participants to maximize risk-adjusted returns across their portfolios?" MORE >>
"The concept of government neutrality on the types of investments for ERISA-governed retirement plans is not the surprise. The surprise is the wording of 'maximum discretion'.... [It's] not defined in ERISA or in the proposed regulation. For example, does a fiduciary need to consider the needs and circumstances of the covered participants -- such that fiduciary responsibility limits the application of the discretion?" MORE >>
"[T]he Proposed Rule addresses only the duty of prudence as it relates to the selection of investments. It does not address the ongoing duty to monitor investments ... The DOL has indicated that it expects to issue additional guidance addressing monitoring obligations in the future." MORE >>
"Broadening access to alternative investments is 'certainly a key part' of Labor's plan, but 'it's really more about ERISA litigation,' said Brad Campbell. 'A growing wave of frivolous ERISA lawsuits' are harming the retirement system, EBSA head Daniel Aronowitz said at a conference. Labor is taking comments on its plan until June 1." MORE >>
"The proposal's safe harbor seeks to establish a legal presumption that fiduciaries meeting certain conditions have acted prudently in their DIA selections. This presumption, if upheld by the courts, should lower the risk profile of compliant selections, including defense, settlement, and insurance costs. Lower risks and costs may encourage fiduciaries to incorporate alternatives and other less traditional investments into their DIAs, either as standalone options or, we think more likely, as components of professionally managed target-date or other pooled fund options." MORE >>
"It is possible to prudently select an investment option that includes alternative investments, but it will take time and acquired expertise.... Fiduciaries who do decide to prudently offer alternative investments can start by using professionally managed funds or offering them through self-directed brokerage accounts.... While not mentioned in the guidance, communications with participants should clearly describe the risks and fees of the investments offered." MORE >>
"The Proposed Regulations are based around three key principles. First, they affirm that ERISA is a law grounded in process ... Second, the Proposed Regulations emphasize that ERISA gives plan fiduciaries maximum discretion and flexibility in selecting designated investment alternatives ... Third, they establish that when fiduciary decision-making follows a prudent process ... courts and other adjudicators should give deference to such fiduciaries under a presumption of prudence." MORE >>
"For plan sponsors, the takeaway is not that immediate action is required, but that the regulatory environment is shifting in a way that may eventually reduce litigation risk in expanded investment menu options -- provided fiduciaries follow a careful, well‑documented process and engage appropriate expertise.... Despite its breadth, the proposal leaves important issues unresolved: [1] No statutory immunity ... [2] No securities law guidance ... [3] No monitoring framework ... [5] No current obligation to act." MORE >>
