Fiduciary Considerations Following Proposed Regulations Allowing Private Equity in 401(k)s

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by Alex Smith

The Department of Labor (DOL) recently issued proposed regulations intended to facilitate 401(k) participants’ access to alternative investments and provide a fiduciary safe harbor applicable to any type of investment option. The proposed regulations were issued in response to the President’s executive order last summer that directed the DOL and Securities and Exchange Commission (SEC) to facilitate 401(k) participants’ access to alternative investments, including private equity, cryptocurrency, real estate, commodities, and infrastructure financing.

The proposed regulations purport to provide plan fiduciaries with a safe harbor that presumes prudent action with respect to the selection of an investment alternative if they evaluate six non-exhaustive factors with respect to a potential designated investment alternative: (i) performance, (ii) fees, (iii) liquidity, (iv) valuation, (v) performance benchmarks, and (vi) complexity. However, the proposed regulations’ safe harbor may be illusory because it does not overrule relevant Supreme Court precedent. The Supreme Court has previously ruled that ERISA does not provide for a presumption of prudence in Fifth Third Bancorp v. Dudenhoeffer. Read more

Welcome To The Future… Fiduciary Considerations as Recent 401(k) Lawsuit Challenges Proprietary Target Date Funds

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by Alex Smith

A recently filed proposed class action lawsuit against IBM’s 401(k) plan fiduciaries highlights the importance for 401(k) plan fiduciaries to carefully select and monitor 401(k) plan investment options, especially the plan’s target date fund. The lawsuit alleges that plan fiduciaries breached their fiduciary duties of prudence and loyalty by retaining several underperforming funds, including a suite of proprietary target-date and target-risk funds, and three Vanguard mutual funds. The lawsuit alleges that the underperforming funds cost plan participants $1.9 billion in returns compared to alternative funds, and the underperformance was obscured by the plan fiduciaries using custom benchmarks to monitor the proprietary target-date funds’ performance.  Read more

My Next Thirty Years… Fiduciary Considerations Following DOL Approving Lifetime Income Option as QDIA

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by Alex Smith

Recently, the Department of Labor (DOL) issued an advisory opinion letter to AllianceBernstein permitting the AllianceBernstein Lifetime Income Strategy program for use as a qualified default investment alternative (QDIA) in 401(k) plans. While this ruling permitting an investment fund with a lifetime income component to qualify as a QDIA is not surprising based on the DOL’s QDIA regulation, it is still the first ruling specifically approving such a fund as a QDIA. Significantly, it only applies to the AllianceBernstein offering. Read more

Beer Never Broke My Heart … Recent 401(k) Lawsuit Challenges Stable Value Fund

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by Alex Smith

A recently filed proposed class action lawsuit against Molson Coors’ 401(k) plan fiduciaries highlights the importance for 401(k) plan fiduciaries to carefully select and continually monitor all 401(k) plan investment options, including capital preservation options. The lawsuit alleges that plan fiduciaries breached their fiduciary duties of prudence and loyalty by selecting the Fidelity stable value fund offering and retaining it in the plan, even though it was significantly riskier and provided inferior returns than comparable funds. The lawsuit emphasizes that over $200 million was invested in the plan’s Fidelity stable value fund during each year at issue. Interestingly, this lawsuit focuses solely on the plan’s stable value fund investment option. At this early stage, the court has yet to rule on the lawsuit and it is unknown whether the lawsuit has merit.

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Some Beach … Fiduciary Considerations As Recordkeeper Sued For Misusing 401(k) Participant Data

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by Alex Smith

A proposed class action lawsuit filed against Empower last month highlights the importance for 401(k) plan fiduciaries to carefully negotiate their services agreements with recordkeepers and other services providers. The lawsuit alleges that Empower took advantage of its position as the 401(k) plans’ recordkeeper by sharing participants’ confidential financial data with an affiliate. The Empower affiliate then allegedly used questionable sales tactics to target participants with large account balances to pressure them into rolling over their funds to an investment platform with high fees and underwhelming returns. At this early stage, the court has yet to rule on the lawsuit and it is unknown whether the lawsuit has merit. Read more

I Might Be In Oklahoma But I’m Not OK … Fiduciary Considerations Following Executive Order Allowing Private Equity in 401(k)s

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by Alex Smith

Last week the White House issued an executive order directing the Department of Labor (DOL) and Securities and Exchange Commission (SEC) to facilitate 401(k) participants’ access to alternative investments, including private equity, cryptocurrency, real estate, commodities, and infrastructure financing. This direction includes the DOL reexamining guidance regarding fiduciary duties with respect to asset allocation funds, clarifying the DOL’s position regarding alternative assets and including them in asset allocation funds, and proposing related regulations and guidance. Read more

How Do You Like Me Now… Plan Fiduciary Considerations Following New DOL Crypto Guidance

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by Alex Smith

The Department of Labor recently issued Compliance Assistance Release No. 2025-01 rescinding Compliance Assistance Release No. 2022-01 that directed 401(k) plan fiduciaries to exercise “extreme care” before adding cryptocurrency as a plan investment option. While the DOL’s recent guidance rescinds its 2022 guidance, it neither blesses cryptocurrency as an appropriate retirement plan investment option nor modifies ERISA’s fiduciary duties. Read more

Truck on Fire … Supreme Court Relaxes ERISA Pleading Standards

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by Alex Smith

The Supreme Court recently issued a decision regarding the pleading standards for ERISA prohibited transactions claims in a case involving Cornell’s 403(b) plan to resolve a federal circuit court split. Under the Supreme Court’s decision, plaintiffs will only need to allege that the plan engaged in a prohibited transaction. The plaintiffs will not need to also allege the absence of a prohibited transaction exemption.

The Supreme Court’s decision could have far-reaching consequences because most transactions a retirement plan enters into with a service provider—such as a recordkeeper, investment advisor, or investment manager—constitute prohibited transactions with a party-in-interest (for which a prohibited transaction exemption typically applies). Plaintiffs may now be able to file lawsuits containing prohibited transaction claims capable of surviving motions to dismiss even though the allegations are meritless or frivolous. For example, the transaction subject to a claim may clearly fit within a prohibited transaction exemption, such as making reasonable arrangements for services for a reasonable price. This could be the case even if the plaintiff’s related ERISA breach of fiduciary duty claims that are part of the lawsuit are unable to survive a motion to dismiss. Read more

Every Little Thing … Employer Considerations as New 401(k) Lawsuit Includes Extensive Claims

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by Alex Smith

A recently filed lawsuit related to Swiss Re’s 401(k) plan stands out because of the extensive assortment of allegations. These allegations against Swiss Re, its 401(k) plan fiduciaries, and the plan’s recordkeeper include:

  • the plan paid excessive recordkeeping fees;
  • the plan’s investment options, including its target date funds, underperformed;
  • some of the plan’s investment options offered lower cost share classes than the share class available in the plan;
  • the plan failed to utilize the assets in the forfeiture account;
  • the plan’s recordkeeper misused participant data to market its Roth IRAs to participants; and
  • the plan’s fiduciaries failed to monitor the recordkeeper’s misuse of participant data.

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Every Little Thing … Considerations Before Adding Crypto to a 401(k) Plan

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by Alex Smith

Fidelity Investments recently announced that it will offer its 401(k) plan clients the opportunity to offer bitcoin as a 401(k) plan investment option later this year.  While this may sound intriguing to some plan fiduciaries and participants, plan fiduciaries should proceed with extreme caution.

Based on the Department of Labor’s (DOL) public pronouncements, it appears the DOL has serious doubts about whether 401(k) plan fiduciaries who include cryptocurrency among their 401(k) plan’s investment options comply with their ERISA fiduciary duties.  In March, the DOL issued Compliance Assistance Release No. 2022-01, in which it expressed “serious concerns” about the prudence of 401(k) plan fiduciaries including cryptocurrency as a 401(k) plan investment option and announced it plans to conduct an investigative program related to cryptocurrency investments by 401(k) plans.  For more information on Compliance Assistance Release No. 2022-01, please see our prior blog post Can’t Touch This … DOL Discourages Plans From Investing in Cryptocurrency.  Following Fidelity’s announcement, a DOL official expressed “grave concerns” about the offering and indicated that the DOL intends to meet with Fidelity to discuss its concerns in comments to the Wall Street Journal. Read more