DoL Rulemaking Would Strengthen 401(k) Executive Order 

On September 23^rd, the Department of Labor (DoL) issued a statement announcing that it would issue a formal rulemaking to implement President Trump’s executive order on alternative asset investments for 401(k) participants. The rule would create a path for fiduciaries to include private equity options in 401(k) plans without risking frivolous litigation.  

As it stands, public employees who participate in defined benefit plans typically enjoy access to private equity returns. State pensions fall under the jurisdiction of state laws, instead of the Employee Retirement Income Security Act (ERISA). Because of this, states have the freedom to broaden their investment options in a manner denied to most employees in the private sector. To their benefit, this has greatly increased their returns. A report from the American Investment Council shows that several state pension funds identified private equity as their best-performing asset class.  

Those in defined contribution plans such as 401(k)s are denied this freedom due to stringent ERISA mandates. Plan sponsors must uphold strict standards of fiduciary responsibility when catering investment options for 401(k) participants. The Supreme Court case Fifth Third Bancorp v. Dudenhoeffer held that fiduciaries are not entitled to a presumption of prudence and thus may be held liable for not exercising the same level of care as a professional. As a result of these legal risks, many 401(k) plan sponsors decline to offer private equity options to avoid potential lawsuits.  

As with any investment, higher returns entail higher risks. Unfortunately, current provisions within ERISA lack an adequate safe harbor for plan sponsors to demonstrate due diligence on alternative assets and shield themselves from legal risks. 

To counter this, the executive order issued by President Trump directs the Secretary of Labor to clarify the duties fiduciaries owe to plan participants under ERISA when deciding to offer alternative asset investments. By February of 2026, the DoL will issue a rule that will specifically outline steps for fiduciaries to undertake when analyzing alternative assets. In complying with the DoL’s rule, fiduciaries would be shielded from liability, resolving the legal risks that have persisted to date. The decision to issue a formal rule instead of guidance is important as agency rules carry the weight of law. Guidance is not legally binding and would not provide an adequate legal shield that would mitigate the liability of offering alternative assets.  

A report from the Committee on Capital Markets provides a snapshot of what the rule could look like. It addresses issues that critics hold against private equity investment such as transparency, liquidity, and disclosures. The proposal highlights limiting how much of an asset allocation fund can be invested in alternative assets. It also calls for a majority of assets to be available to meet short-term plan liquidity needs. The structure of private equity options would be offered through a target-date fund. This investment vehicle would gradually shift asset exposure to become more risk-averse as the invested participant approaches retirement. These concrete recommendations should be incorporated into the DoL rule to ensure that plan sponsors can confidently take full advantage of the freedom afforded by President Trump’s executive order.  

Investors would benefit from being able to take advantage of higher returns and greater exposure to the private economy. The number of publicly listed companies in the United States has halved since its peak in 1996. Private equity has grown to encompass a greater share of the economy. Not only would this policy shift diversify retiree portfolios, but it could also boost investment and expand the pool of available capital for limited partners to access.  

President Trump took decisive action to remedy this disparity in the investment market for future retirees. The Department of Labor’s efforts to reform 401(k) investment rules will enhance returns for those saving for retirement and remove barriers preventing private sector employees from securing the same opportunities as public employees. The administration is empowering millions of savers to control their own investment strategies rather than having the state manage them.