President Trump’s executive order encouraging 401(k) plans to include alternative investments such as private equity, private credit, cryptocurrency, commodities and real estate was one of the most controversial benefits proposals in years. Some plan advisers made alarmist statements that no plan should even consider alternative investments, which are usually broadly defined as investments other than stocks, bonds and cash, because they were risky and had higher fees than traditional investments. The plaintiffs’ bar pledged to sue plan fiduciaries who added alternative investments to their plans.
The Department of Labor (DOL) was tasked with developing guidance to implement the executive order and in March released proposed regulations. The executive order and the regulations don’t mandate that plans offer alternative investments, of course, since ERISA does not mandate any specific investments. But when all is said and done, the Department of Labor’s regulations, which include a safe harbor for plan fiduciaries who make investment decisions, turn out to be not so controversial after all. In fact, the regulations are a clear and welcome guide to plan fiduciaries on what constitutes a prudent investment process for any designated investment alternative. They contain helpful examples and recognize that alternative investments come in many forms, have different risk profiles and may be made directly or through pooled investment vehicles. All of this is in furtherance of the DOL’s goal of reining in frivolous ERISA litigation, although agency action alone might not be able to control frivolous ERISA litigation to the extent desired by the DOL.
Key Points in the Guidance.
The proposal stresses that fiduciaries who want to offer alternative investments in their plans must do their diligence and consult experts when necessary. The proposal lists six “non-exclusive” factors to be considered by fiduciaries when evaluating designated investment alternatives, including alternative investments, as part of a prudent investment process. The six factors are performance, fees, liquidity, valuation, benchmarks and complexity. Among the points made in the examples are that plans may take good customer service into account when reviewing fees and that all investments must be measured against a “meaningful benchmark.”
A meaningful benchmark must have “similar mandates, strategies, objectives and risks.” The Supreme Court will be reviewing a Ninth Circuit decision, Anderson v. Intel Inv. Policy Committee, 137 F.4th 1015 (2025), addressing this same issue as it applies to pleading standards, and will determine whether plaintiffs alleging poor fund performance need to plead a meaningful benchmark in order to survive a motion to dismiss. The facts of that case are recognizable in the regulations’ examples of prudent conduct, and it is to be expected that the DOL will weigh in on behalf of the Intel fiduciaries in that case.
Curiously, determining that the investment would not involve a non-exempt prohibited transaction is not one of the factors even though some of these investments may be offered through vehicles treated as holding the assets of investing plans under the plan asset regulations or be offered by parties with existing relationships with the plan.
The DOL Attempts to Control Frivolous Litigation The DOL’s view expressed in the Preamble to the regulations is that courts should recognize a presumption that fiduciaries who comply with the safe harbor have engaged in a prudent process. The Preamble also expresses the hope that courts will recognize a rule similar to the Firestone rule that applies for administrative decisions. Under Firestone, decisions cannot be challenged unless they are arbitrary or capricious.
Safe Harbors Alone Can’t Stop Lawsuits. Fiduciaries following the safe harbor will not be pursued by the Department of Labor, but can a safe harbor really control frivolous litigation as the DOL hopes? It isn’t clear. Fiduciaries who follow the safe harbor can still be sued, and are unlikely to prevail on a motion to dismiss if there are prohibited transaction claims as a result of the Supreme Court’s Cunningham decision (604 U.S. 693). Under the Supreme Court’s Loper Bright decision (200 U.S. 321), courts no longer need to give deference to administrative agency guidance such as the safe harbor.
That doesn’t mean that courts will not take the safe harbor into account. While the deference the DOL would like to see won’t be automatic, courts should still look at the fiduciary process set out in the safe harbor to determine whether a decision was prudent at the time it was made. Individual judges may recognize a presumption of prudence if the safe harbor is used. In fact, the safe harbor was designed after a review of the standards applied by the courts in reviewing investments, and it shows. Ultimately, the safe harbor should help more defendants who stay the course and don’t settle to prevail, but that is not the same as defeating frivolous claims on a motion to dismiss. Still, the plaintiffs’ bar is likely to find that successfully challenging reasoned fiduciary decisions, including decisions to include alternative investments, is harder than they anticipated.
All of which points to the need for legislation to level the litigation playing field and better control frivolous litigation. One way to do that is by establishing statutory presumptions that apply in all courts across the country. The U.S. Chamber of Commerce has put forth a proposal for such national ERISA litigation reform as a possible model for Congress.
Takeaways for Fiduciaries Considering Alternative Investments. It is possible to prudently select an investment option that includes alternative investments, but it will take time and acquired expertise. In fact, the investments grouped together in the category of alternative investments have different risk and return profiles that should be evaluated separately. There have been a number of articles recently about problems in the private credit market, for example, that suggests extra caution regarding that market. Some question whether cryptocurrency has inherent value. However, real estate, commodities and gold and silver are physical assets. Each investment category should be evaluated independently.
All fiduciaries responsible for investments should be familiar with and follow the safe harbor (with any modifications made in final regulations). Fiduciaries who do decide to prudently offer alternative investments can start by using professionally managed funds or offering them through self-directed brokerage accounts. In the Preamble to the regulations, the DOL asks if an additional factor should be the participant profile, and fiduciaries don’t need to wait for the DOL to act before considering this. For example, employees of a financial firm are more likely to understand complex investments and to have an interest in them.
While not mentioned in the guidance, communications with participants should clearly describe the risks and fees of the investments offered. A participant’s exposure to alternative investments can also be limited so they are a part of a more diversified portfolio. This can be done through a fund such as a target date fund which will always include traditional investments or by limiting the percentage of a participant’s account that can be invested in alternative investments.
Alternative Investments Aren’t for All Plans. Fiduciaries shouldn’t consider alternative investments if they are not prepared to do their homework, understand how the investments and fee structures work, and follow the process in the guidance. Fiduciaries who include investments without doing their homework won’t be serving their participants, will be sitting ducks in litigation, and can be personally liable for losses from imprudent investments.
Whatever fiduciaries decide to do, the decision should be made following and documenting a diligent process, with professional assistance as needed and solely in the interest of the plan’s participants and beneficiaries.