Source: Fortune
Summary
The Department of Labor is finalizing a rule that would allow 401(k) fiduciaries to include alternative investments, such as private equity, in retirement plans. The rule, first proposed in March, provides a framework for evaluating these investments based on six factors, including risk and fees. Critics argue the rule is too novel, but the Department says it aligns with the original intent of ERISA. Research suggests private assets can improve retirement outcomes, but plan sponsors have been hesitant due to legal uncertainty. The rule aims to reduce litigation risk and give fiduciaries more discretion.
Our Reading
The numbers tell one story.
The Department of Labor is finalizing a rule that allows 401(k) fiduciaries to include private market assets.
Critics say the rule is too new, but the Department says it’s in line with ERISA’s original intent.
Research shows private assets can boost retirement income by 6 to 8 percent.
The rule aims to reduce litigation risk and give plan sponsors more freedom.
Author: Evan Null
Background on the Rule
The Department of Labor’s proposed rule is part of an effort to modernize retirement plan investment options. It was first introduced in March and has since received over 46,000 comments. The rule is designed to provide a safe harbor for fiduciaries who want to include alternative investments in 401(k) plans. This includes private equity, private credit, and private real assets. The goal is to expand access to these types of investments for retirement savers.
ERISA and the Fiduciary Framework
The Employee Retirement Income Security Act (ERISA), established in 1974, created a framework for private-sector retirement plans. It gave plan sponsors the freedom to innovate and better serve workers. However, over the past 50 years, the law has been undermined by uncertainty, litigation, and regulatory changes. As a result, many plan sponsors have become hesitant to use tools that could improve retirement outcomes, such as private market assets.
How the Rule Works
The proposed rule is principles-based and asset-neutral, meaning it doesn’t favor one type of investment over another. It outlines six factors that fiduciaries should consider when selecting investment options: risk-adjusted performance, fees, liquidity, valuation, benchmarks, and complexity. If a fiduciary follows this process, they are granted a legal presumption of prudence. This allows them to create new investment options for workers without fear of liability.
Criticism and Concerns
Critics have raised concerns about the rule, particularly in light of a rough 2025 for private equity. Many boom-era investments are expected to underperform, leading some to question the wisdom of including private assets in retirement plans. However, the rule is structured as a process requirement, not a blanket mandate. A fiduciary who fails to document the six factors would not receive the legal presumption of prudence and would remain liable for any poor outcomes.
Impact on Workers
The rule is seen as a way to improve retirement outcomes for workers. Research from the Georgetown University Center for Retirement Initiatives shows that including private assets in target-date funds can boost retirement income by 6 to 8 percent. This is especially true for average workers, caregivers, and those with lower incomes. However, the rule does not require all plan sponsors to include private assets. It leaves the decision up to fiduciaries, who must weigh the potential benefits against the added costs and complexity.
