The U.S. Department of Labor’s proposed regulations outline how managers of employer-sponsored 401(k) plans and other participant-directed defined contribution plans can include alternative assets while satisfying ERISA’s requirements. Haynes Boone Counsel Thomas Hogan spoke with Private Equity Law Report about the proposal’s approach to incorporating private equity and other alternative assets into 401(k) plans.
Read an excerpt below:
Although PE and other alternative assets are most likely to be included on 401(k) plan menus through TDFs, multi-asset allocation funds or managed accounts, that seems to diverge from the Executive Order, stated Haynes Boone counsel Thomas Hogan.
“The authors of the Executive Order were arguably considering the inclusion of individual PE investments and other alternative investments directly in 401(k) plans, but I just don’t see a path to that,” he continued. “It appears the DOL – if we are reading between the lines – has come to that conclusion based on all the different variables they need to consider, including related SEC guidance, fiduciary standards under ERISA and the fact that you cannot have conflicted advice or valuations.”
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“The makeup of plan participants, including their investment sophistication, financial situation and age, are important considerations for planning or investment committee members,” observed Haynes Boone counsel Thomas M. Hogan. “As to age, are they relatively young, or are they nearing or well past retirement and they don’t have a long-time investment horizon?”
Another problem is that plan participants often do not look at the detailed fee and expense disclosures that are prepared by plan fiduciaries, Hogan observed. That’s potentially problematic for plan sponsors given that recent legal developments have specifically addressed the degree of participants’ awareness and how they are informed about fees. “The U.S. Supreme Court issued a unanimous opinion in 2020 [in Intel Corp. Investment Policy Committee v. Sulyma] providing that mere receipt of a fee disclosure document by a plan participant does not constitute actual knowledge of the information,” he explained. “So there’s always this push, particularly from the smaller employers with limited resources – more education is necessary, and that often falls on the plan providers.”
Even if plan fiduciaries put together suitable materials and work to educate plan participants, that may not ultimately fulfill their duties. “It also falls on plan and investment committees and employers to ask, ‘Do my plan participants have a suitable level of sophistication to understand what the applicable fees and fee structures entail at both the plan and individual level?’” Hogan noted. “If they feel it is not the right move, then it is my view that they should not put the particular offering on their menu,” he reasoned.
The risk, however, is that omitting a designated investment alternative due to insufficient investor sophistication could raise questions from plan participants about why an option with positive risk-adjusted returns was not included in a plan menu, Hogan observed. The six safe harbor factors in the Proposal are particularly for helping plan fiduciaries facing that issue, he asserted. “Maybe a thorough process that documents procedural prudence, looks at alternative options and decides not to include an option in the plan would be enough to avoid litigation.”
Read part one from Private Equity Law Report here and part two here.
