The Trump administration in the United States is pushing a plan to expand the investment options of 401(k) retirement plans to alternative assets such as private equity funds and cryptocurrencies. But with the possibility of legal disputes still lingering, it remains unclear whether the overhaul will be realized.
According to the Wall Street Journal (WSJ) on the 16th, President Trump last month issued an executive order directing the Labor Department to devise ways to reduce employers' litigation burdens when including alternative investments in 401(k) plans. He argued, "Because of excessive litigation, millions of Americans have been deprived of the opportunity to benefit from investments in alternative assets, a core element of retirement planning." Unlike the caution shown during the Biden administration, the administration's position is to support corporations in offering alternative investment products more actively.
However, the legal community noted that the administration's actions are unlikely to guarantee employers complete immunity. Current U.S. federal law requires employers to act in the "best interests" of plan participants, and this vague principle has led to hundreds of lawsuits over the past 20 years, including over excessive fees. Even large companies such as Boeing and Lockheed Martin ultimately paid settlements totaling millions of dollars.
The core concern for corporations is that including high-cost, high-risk assets such as private equity funds or hedge funds in 401(k)s could embroil them in legal disputes. Because alternative assets are complex in structure and carry high fees, there is ample room for lawsuits alleging that they fail to meet the legal duty to ensure "the best interests of participants."
In practice, excessive fees, low liquidity, insufficient disclosure, and poor post-investment oversight can easily lead to violations of the duty of prudence under the Employee Retirement Income Security Act (ERISA). About a decade ago, Intel included alternative investments in its plan and was sued on that basis, fighting in court for years; it ultimately won, but the case did not set a precedent for similar situations. Representatives of financial advisory firms said, "The administration has limited tools to curb litigation," and predicted, "It will not be easy for corporations to adopt alternative investments with confidence."
The Labor Department plans over the next six months to draft guidance for corporations that offer alternative assets within diversified funds. This may include a "safe harbor" provision to protect corporations that follow certain procedures from lawsuits. However, with the Supreme Court recently issuing rulings that limit agencies' authority to interpret laws, observers say it is uncertain whether the new guidance will have real protective effect. Douglas Tang, an attorney at the large U.S. law firm Patterson Belknap, noted, "As precedents that deferred to agency interpretations when the law was unclear are overturned, the guidance's force could be weakened."
Unless Congress amends the law, litigation risks are likely to remain. Lisa Gomez, former Director-General of the Employee Benefits Security Administration (EBSA) under the Labor Department during the Biden administration, said, "Even if corporations follow safeguards that protect them from liability when they comply with certain rules, they may still face lawsuits." By contrast, Daniel Aronowitz, the current EBSA Director-General, stressed, "We will end the era of regulation through litigation," making clear a pro-business stance.
Bradford Campbell, a former Labor Department official, said, "The Labor Department is becoming increasingly proactive in defending corporations." But other experts believe legislative action by Congress is needed to address the root issues. In fact, unless Congress amends laws related to 401(k)s to add safe harbor provisions for alternative investments or tighten the requirements for filing lawsuits, uncertainty is expected to persist.