Dive Brief:
- The U.S. Department of Labor on Monday proposed a rule that would clarify and provide safe harbor for a fiduciary’s duty of prudence under the Employee Retirement Income Security Act with respect to “alternative assets” such as cryptocurrency, private market investments, real estate, commodities and other investments.
- DOL proposed that any fiduciary that “objectively, thoroughly, and analytically” selects investments based on six factors — performance, fees, liquidity, valuation, benchmarking and complexity — is presumed “reasonable and entitled to significant deference.”
- Comments on the proposal are due June 1.
Dive Insight:
The proposed rule directly follows an executive order issued last August by President Donald Trump, which directed the department to “facilitate access to alternative assets” for fiduciaries managing 401(k)s and other defined-contribution plans.
In a DOL news release, Secretary of Labor Lori Chavez DeRemer said the rule represented a “major win” for American workers and would show “how plans can consider products that better reflect the investment landscape as it exists today.”
The Securities and Exchange Commission, which collaborated with DOL on the proposed rule, said it was a “long-overdue improvement” that would allow Americans to “participate more fully in innovation and economic growth through well-diversified long-term investments,” per Chairman Paul Atkins.
Fiduciaries have previously been authorized to consider alternative assets but “almost none have done so,” according to DOL.
In 2022, the Biden administration warned 401(k) fiduciaries against cryptocurrency investment, saying they should “exercise extreme care” before adding such an option to their menu for plan participants. DOL’s Employee Benefits Security Administration noted the risks of cryptocurrency at the time, including its highly speculative nature, the difficulty of separating hype from true value, its vulnerability to hacking and theft, valuation concerns and evolving rules and regulations of its market.
Last May, Trump’s DOL rescinded this warning, suggesting the Biden administration “put their thumb on the scale” and that it was returning to “its neutral stance.”
Workers have increasingly voiced interest in cryptocurrency options, according to an expert in the field who spoke to HR Dive in 2022. He suggested employers interested in providing the offering use certain guardrails, including ensuring fiduciaries follow all steps in the investment policy statement, keeping participation optional and considering a limit on how much can be invested in crypto.
The Private Equity Stakeholder Project, a nonprofit watchdog group that focuses on private equity and other private funds, expressed concern about the proposed rule — particularly the regulatory safe harbor for private equity investments. Such protection would make it more difficult for workers to challenge risky investments or high fees, PESP said.
“At a minimum, the Department of Labor should hold private equity to the same disclosure and transparency standards expected of publicly-traded stocks, mutual funds, and ETFs, including clear reporting on what funds are investing in, the fees and expenses retirement savers are paying, the amount of debt funds are using, and how these investments are actually performing compared with stocks,” Jim Baker, executive director of PESP, said in a release provided to HR Dive.