Under a new proposal from the Trump administration, these changes could make it easier for 401(k) plans to include private credit, private equity, cryptocurrencies and real estate investments. The Department of Labor’s plan is currently seeking public comment and aims to ease the threat of class-action lawsuits that have deterred some employers from increasing alternative investments.
“The proposed rule will show how each plan can consider products that better reflect the current investment environment,” Labor Secretary Loren Javier Chávez-Dremer said in a statement on Monday. A Labor Department official said at a briefing that the department hopes to complete the final rule by the end of the year.
This highly anticipated proposal is widely regarded as a victory for Wall Street. Meanwhile, some industry giants that market products to 401(k) plan participants are facing a growing number of redemption requests, forcing them to impose restrictions on redemptions. In recent weeks, private credit clients of companies such as Ares Management Corp. and Apollo have been pulling out of their accounts.
When asked about the large number of redemption requests, an official from the institution said that the proposed rules were designed to be effective in the long term, regardless of market trends.
BlackRock, which is actively expanding its private market, the Managed Funds Association, which represents private equity firms, and other industry groups all expressed their appreciation for the proposal.
“Pension funds have long used alternative investments to help secure retirement, and 401(k) savers should have similar broad investment options,” said Brian Corbett, chairman of MFA, in a statement.
The proposal points out that in 2022, as high as 99% of U.S. state and local government pension plans held a certain amount of alternative investments in their plans. “In contrast, defined contribution plans are much less likely to hold alternative investments. By 2024, only 4% of defined contribution plans offered alternative investments,” the department said.
Alternative asset management companies have long sought these changes, which will update the guiding principles on how plan sponsors fulfill their fiduciary duties to employees. This standard is one of the strictest that plan sponsors must meet before offering investments and has been the focus of numerous lawsuits over the years.
Some retirement plan providers, such as Empower, have begun to incorporate alternative assets into their investment portfolios. The company stated in May last year that it was collaborating with firms like Apollo and Franklin Templeton to start offering private equity, credit, and real estate investments in some accounts.
The industry has been lobbying hard in Washington to make it more difficult to file lawsuits against these plans. Supporters argue that formal rules are needed to reassure plan sponsors. Consumer advocates, however, question why a litigation shield is necessary if alternative assets are such sound investments.
Incorporating 401(k) plans into these products could turn workers’ retirement savings into a Ponzi-like scheme, providing a lifeline to an industry in desperate need of new funds, said Oscar Valdes-Viera, senior policy analyst at the consumer advocacy group Americans for Financial Reform, in a statement.
