The U.S. Department of Labor is nearing the release of a proposed rule on advisors’ duties when recommending alternative investments for defined contribution plans.
According to the White House’s Office of Management and Budget, the Labor Department submitted its proposed rule entitled “Fiduciary Duties in Selecting Designated Investment Alternatives” on Jan. 13.
The rule comes after President Donald Trump’s August executive order aimed at making it easier to include alternatives such as private equity, real estate and cryptocurrency in employees’ 401(k) plans.
In the August order, Trump directed the DOL to propose new regulations on alts in retirement plans subject to the Employee Retirement Income Security Act within six months. It also directed Labor Secretary Lori Chavez-DeRemer to work with other regulators to determine necessary rule changes to ease alts access in 401(k)s, and for the SEC to help with that effort in participant-directed retirement plans.
Alts have long been part of defined-benefit plan portfolios, like pensions, and they’re not expressly barred from defined contribution plans. However, fiduciary rules make it tricky to include them in 401(k)s.
Meanwhile, asset managers are ravenous to tap into the approximately $13 trillion 401(k) opportunity and are anxious about a slowdown in institutional investors’ appetite for alts.
Trump first broached increasing private market access in 401(k)s with an executive order during his first term, which the Biden administration rescinded. Earlier this year, the DOL rescinded a Biden-era order discouraging the use of crypto in defined-contribution plans.
Since the order, SEC Chair Paul Atkins has affirmed the need for retail alts access “within reason,” while Commissioner Mark Uyeda called for litigation reform to protect plan sponsors by making it harder for investors to sue ERISA fiducaries for offering alts in 401(k) plans.
Supporters of increased alts access stress that it would help retail clients benefit from the multi-decade boost in private markets (accompanied by a reduction in companies going and staying public).
But critics caution about a domino effect that could endanger Americans’ retirement savings; in a speech at the Brookings Institution last December, former SEC Commissioner Caroline Crenshaw said opening private markets wholesale to retirement assets exposed retail investors to “risky” investments designed for non-retail players.
“To justify this irresponsible departure from foundational pillars of the securities laws, my colleagues use lots of buzzwords—freedom, diversification, democratization,” she said. “Call it what you will, at bottom, it’s risky, and it’s reckless.”
Asset managers are increasingly signaling their desire to enter the space; Apollo Global Management CEO Mark Rowan has spoken about developing products for 401(k)s, while Empower, the country’s second-largest workplace retirement plan provider, unveiled a partnership with investment fund managers and custodians last year to offer alts through collective investment trusts (the firm added Blackstone to its cadre of managers this week).
After the OMB reviews the rule, it will be released for public comment, a process that typically takes about 60 days. Afterwards, rules are generally revised based on comments, as needed, and submitted back to the White House for final review.
