Employers that want to offer 401(k) participants access to private equity get new rule

By Jeanne Sahadi, CNN

(CNN) — The Department of Labor unveiled on Monday a new proposed rule for 401(k) plan sponsors that want to offer plan participants the option of investing in private equity and other “alternative” investments like crypto and commodities.

The proposed rule gives plan fiduciaries “maximum discretion and flexibility in selecting any particular investment as a designated investment alternative,” according to the DOL.

“The department’s days of picking winners and losers are over. Our rule clearly spells out that managers must evaluate any and all potential product offerings by following a prudent process,” said Deputy Secretary of Labor Keith Sonderling in a statement. “This proposal is decidedly neutral and refrains from saying that any asset class is any better or worse than other investment types, as the law requires.”

That may be welcome news to the private equity and credit industries, which have long sought access to the trillions of dollars invested in workplace retirement plans.

Employers have technically always been free to offer alternative investment options in their 401(k)s. But very few have done so to date because such investments have been more opaque and expensive than publicly traded options, and the threat of being sued by participants or penalized by the DOL for not providing a menu of prudent, reasonably priced investments was a deterrent.

“Fiduciaries don’t need permission to consider different types of investments. They need clarity on how to do it prudently and confidence that a sound process will be respected,” said Lisa Gomez, assistant secretary of labor for employee benefits security during the Biden administration, in an email.

And, in her view, the proposed rule offers a new level of detail on what constitutes that sound process.

But even if the DOL’s proposed rule makes it clearer how to decide whether to include alternative investments, that doesn’t mean private equity and crypto will appear on your menu of investments anytime soon.

Why?

Because employers are not required to offer the option. And even if they want to, they still need to go through a careful process to determine if an investment meets their standards. They must “objectively, thoroughly, and analytically consider, and make determinations on factors including performance, fees, liquidity, valuation, performance benchmarks, and complexity,” as the DOL put it.

Whether the new rule will make employers feel safe enough from outside litigation remains a question. “Our initial read is the Department of Labor appears to have gone as far as it could using its regulatory authority to protect fiduciaries,” said Jaret Seiberg, a financial services policy analyst at TD Cowen Washington Research Group, in an analyst note. “Yet we remain skeptical that this will encourage fiduciaries to include alternatives in 401(k) plans until the courts have concurred that this language protects advisors from litigation. That means it could be several years before we see the real impact from this proposal.”

The DOL’s proposed rule, which may take months to finalize, was issued at the behest of President Donald Trump, who last August issued an executive order seeking, among other things, to “relieve the regulatory burdens and litigation risk” on 401(k) plan sponsors.

Sen. Elizabeth Warren, a staunch critic of giving those in private equity, private credit and crypto easier access to retirement plans, came out in opposition to DOL’s proposed rule, especially given recent poor performances in those markets.

“Americans facing an uncertain future in Trump’s economy will now have more reasons to question the security of their retirement savings – all so that Trump’s Wall Street buddies have another pile of cash to play with,” Warren said in a statement. “Anyone who cares about the financial security of working people should oppose this proposed rule.”

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