Labor Department Aims to Lower Barriers to Alternative Investments for 401(k) Plans

The Labor Department’s Employee Benefits Security Administration (EBSA) issued a proposed regulation Monday (March 30) that it said would expand access to alternative investments in 401(k) plans.

The proposed rule would clear regulatory burdens and lower litigation risks for prudent fiduciaries, thereby increasing the number of potential retirement investment options for more than 90 million Americans, the Labor Department said in a Monday press release.

“This proposed rule will show how plans can consider products that better reflect the investment landscape as it exists today,” Labor Secretary Lori Chavez-DeRemer said in the release. “This greater diversity will drive innovation and result in a major win for American workers, retirees and their families.”

Managers of defined contribution plans have always had the authority to consider alternative assets, but few have done so, according to the release.

The Biden administration contributed to this trend in 2022 when it issued a now-rescinded compliance release that warned fiduciaries about including cryptocurrency options in 401(k) plans, the release said.

The proposed rule would give plan fiduciaries “maximum discretion and flexibility” in selecting investment alternatives, while requiring them to consider these alternatives objectively, thoughtfully and analytically, per the release.

“The department’s days of picking winners and losers are over,” Deputy Labor Secretary Keith Sonderling said in the release. Sonderling added that the proposed rule requires managers to follow a “prudent process” in evaluating potential product offerings and that it “refrains from saying that any asset class is better or worse than other investment types, as the law requires.”

In March 2022, the Labor Department warned retirement plan fiduciaries to use caution before adding a cryptocurrency option to a 401(k) plan’s investment menu.

The department said that it had “serious concerns about the prudence” of adding a crypto option and that the people overseeing investments in crypto “should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks.”

When the EBSA rescinded a 2022 compliance assistance release that directed fiduciaries to exercise “extreme care” before adding crypto options to the investment menus for 401(k) retirement plans, the agency said the language in the guidance was not in line with the requirements of the Employee Retirement Income Security Act or with the department’s “historically neutral, principle-based approach to fiduciary investment decisions.”