On March 30, the Department of Labor (DOL) released a proposed rule that provides a safe harbor to fiduciaries for offering alternative investments (e.g., private equity, cryptocurrency, certain annuities, etc.) in retirement savings plans. This follows up President Trump’s Executive Order 14330 instructing DOL to issue rules allowing section 401(k) plans to invest in private markets and to reduce litigation risk.
The proposed rule is asset-neutral and sets up a framework for determining how a fiduciary can, within the general fiduciary rule, evaluate alternative investments. The general rule requires a plan fiduciary to discharge his or her duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims.”
The proposed rule framework sets out six factors a fiduciary must consider when evaluating whether a plan should offer an alternative investment, such as private equity, cryptocurrency, certain kinds of annuities, and others. They are performance, fees, liquidity, valuation, performance benchmarks, and complexity.
Performance — The proposed regulation states that fiduciaries should seek to maximize returns but are not required to select the lowest cost investments.
Fees — In evaluating an investment’s fees, a fiduciary must take into account “risk-adjusted expected returns, net of fees and expenses, and any other value the designated investment alternative brings to furthering the purposes of the plan.” The proposed regulation explicitly notes that a prudent fiduciary may choose to pay more in fees for greater services.
Liquidity — Fiduciaries must determine that their designated investment alternative will have “sufficient liquidity” to meet the anticipated needs of the plan based on a plan-specific determination looking at the terms of the plan as well as a participant-specific determination looking at the experience of the plan.
Valuation — On valuation, the proposed regulation states that plan fiduciaries must determine that a designated investment alternative has adopted adequate measures to ensure that the investment can be timely and accurately valued in accordance with the specific needs of the plan.
Benchmarking — Fiduciaries must use a “meaningful benchmark,” defined as “an investment, strategy, index, or other comparator that has similar mandates, strategies, objectives and risks to the designated investment alternative” creating a “sufficient likeness” between the funds being compared and no one benchmark is an appropriate or meaningful benchmark for all designated investment alternatives on a plan menu.”
Complexity— The proposed regulation states that fiduciaries must understand the investments being offered, and notes that they may seek assistance from a qualified advisor if they feel they lack the skills or knowledge necessary to evaluate a potential investment.
The DOL-identified non-exhaustive list of six factors would allow a fiduciary to “objectively, thoroughly, and analytically consider and make determinations about selecting the designated investment alternatives for the plan menu,” DOL said. The proposed regulation defines a designated investment alternative as “any investment alternative designated by the plan into which participants and beneficiaries may direct the investment of assets held in, or contributed to, their individual accounts, including a qualified default investment alternative.” The definition does not include brokerage windows, self-directed brokerage accounts, or similar arrangements that would allow plan participants and beneficiaries to select investments beyond the designated investments of the plan.
The proposed regulation provides examples of what a prudent process may look like within each factor as well as examples demonstrating what would not constitute prudent action.
One area where the proposed regulation did make an asset-specific comment involves indexed annuities. With respect to these investment-type annuities, DOL said on lifetime income (annuities), the guidance provides a safe harbor for annuities with liquidity restrictions. It says a liquidity premium is inherent in these products and is an appropriate plan component.
DOL worked on the proposed regulation with both the Securities and Exchange Commission and the Treasury Department. Treasury Secretary Scott Bessent praised the proposal, saying
“This proposed rule is an initial step in implementing the President's Executive Order in a safe and smart manner, broadening access to additional retirement plan options for millions of Americans while being mindful of the importance of protecting retirement assets,”
The proposed regulation was published in the Federal Register on March 31. It is subject to a 60-day comment period, which closes June 1. DOL says it hopes to have the proposal finalized before year-end.
Prospects: Initial reaction to the proposed regulation is still emerging, with many early commenters noting with some approval its asset-neutral structure. However, comments are expected on whether the proposal achieves its intended goal of balancing reducing risk of litigation with opening up investment choices available to fiduciaries within the general rules of assessing risk/potential reward for plan participants. As experts dig deeper into it, no doubt there will be comments suggesting refinements. Concerns have been expressed by some Democrats including Senator Elizabeth Warren (D-MA) about the risks of including these kinds of assets in retirement accounts.
NAIFA Staff Contacts: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org