On Monday, the Department of Labor (DOL) released a proposed rule regarding the inclusion of alternative assets (alts), including private equity, private credit, real estate, crypto, infrastructure, and hedge funds, into 401(k) plans. The new rule provides clarity to fiduciaries (who manage plans on behalf of plan sponsors, workers, and retirees) on how to evaluate the products in a sound way, and effectively treats them in a manner that is equal to other asset classes. This should eventually allow fiduciaries the opportunity to appropriately include alt investments in 401(k) investment portfolios, which—if invested in a prudent manner—should allow for higher returns on a less volatile investment mix for plan participants.
Investors may not see these options on their menu of available investment choices in the near term, as products will need to go through a careful process to ensure an investment meets standards. According to the rule, fiduciaries must “objectively, thoroughly, and analytically consider, and make determinations on factors including performance, fees, liquidity, valuation, performance benchmarks, and complexity.” If these six factors are carefully considered using a sound process, this proposed rule would provide fiduciaries with safe harbor provisions that would limit their liability in legal action regarding investment decisions.
Even with these expanded safe harbor provisions, some fiduciaries may stay on the sidelines until courts have had a chance to rule on whether this new language will truly protect advisors against litigation.
However, going through this process is worth it for American investors. In a recent post, we noted the potential value for workers and retirees if alt investments were allowed to be included in portfolios. One study noted that a typical 401(k) participant could receive an extra $200 per month in retirement benefits from this change alone, while another concluded that the inclusion of alts in plans could increase retirement wealth by over 10%. Studies from organizations across the political spectrum have also concluded that including alts in the portfolio investment mix can substantially improve fund performance.
Expanding eligible assets also helps diversify Americans’ retirement holdings beyond publicly-traded stocks and bonds. Moreover, adding these asset classes into the investment mix should reduce volatility, expand investment options in the face of shrinking choices in public equities, and possibly even provide a sound hedge against cyclical or sectoral investment declines.
While this rule does not specifically include plan design recommendations that we have noted previously, its expectation that fiduciaries carefully consider six core investment factors will likely encourage structures that help mitigate risk for individual plan participants.
The rule goes into some detail in regard to these factors, including fee comparisons between investment alternatives, differing liquidity needs for workers in different industries, valuing assets that are not regularly traded on public markets, and using benchmarks to evaluate performances across assets. Taken together, the rule allows fiduciaries to treat asset classes equally: the government has explicitly chosen not to pick “winners or losers” among them. By requiring that all investments must be prudently assessed against other types in consistent ways, the rule allows for the incorporation of alt investments in a way that does not put Americans’ retirement nest eggs at risk.
We applaud DOL on the release of this proposed rule. As we believe that this rule will likely improve the financial future of our nation’s retirees, we look forward to seeing it implemented.