Newly introduced rules by the US Department of Labour look to clarify fiduciary standards and safe harbour obligations for investments into alternatives by DC pension schemes in the US.
The rules follow an executive order signed by President Trump in August which looked to widen asset classes that can be accessed by investors with 401(k) retirement savings, away from a traditional stocks and bonds portfolio.
According to the DoL, the proposed regulation’s aim is to alleviate certain regulatory burdens and litigation risk that can prevent the returns and asset diversification “necessary to secure a dignified and comfortable retirement.”
Additionally, when Employee Retirement Income Security Act fiduciary decision-making follows the process reflected in the proposed regulation, arbiters of disputes should defer to fiduciaries under a presumption of prudence, known as safe harbour.
Under the proposed regulation, private credit and private equity can be incorporated by fiduciaries into a retirement plan under the provision that it is part of a diversified portfolio.
Andy Banducci, ERISA Industry Committee senior VP for retirement and compensation policy, says: “The proposed rules are a meaningful and important step by the Department of Labor to bring needed clarity and certainty for retirement plan managers selecting the options to be made available to plan participants.
“Too often, fear of meritless litigation reduces innovation in 401(k) investment offerings – and we applaud the Department’s work to ensure that plan managers will have a framework on which they can rely to evaluate traditional and emerging investment options, including private market alternatives and lifetime income strategies.”
In December 2021 under the Biden administration, the DoL had issued a statement on private equity investments which cautioned fiduciaries against its selection as a designated investment alternative.
The Department subsequently rescinded the statement in the Trump executive order in August, purportedly because the statement deviated from the Department’s historically neutral and principles-based approach to fiduciary investment decisions, creating a “potentially costly chilling effect” on the market.