Things I Worry About (15): Executive Orders, Private Funds, and Fiduciary Standards (1)


fiduciary
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Key Takeaways

  • The Trump administration has issued an Executive Order about facilitating 401(k) investments in “alternative assets.”
  • The Order directs the Secretary of Labor to examine current guidance and decide if it is appropriate for that purpose.
  • The Order also directs the Secretary of Labor to issue guidance to clarify fiduciary responsibilities for 401(k) investing in alternative assets and to consider creating a fiduciary safe harbor.

This article examines the President’s August 7 Executive Order (EO) entitled Democratizing Access to Alternative Assets for 401(k) Investors (Democratizing Access to Alternative Assets for 401(K) Investors – The White House) and some of the misunderstandings about what the EO says.

The EO uses the term “alternative assets” and defines it as follows:

  • Private market investments, which would include, among others, private equity, private debt, and hedge funds.
  • Interests in real estate and debt instruments secured by real estate.
  • Actively managed vehicles holding digital assets.
  • Investments in commodities.
  • Interests in projects financing infrastructure development.
  • Lifetime income investment strategies including “longevity risk-sharing pools.”

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Things I Worry About (14): ESG and the Political Back-and-Forth at the DOL


General
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Key Takeaways

  • The Trump administration is dropping its defense of the Biden-era ESG regulation on prudence for investment selection for fiduciaries of ERISA-governed retirement plans.
  • In turn, the Biden era regulation reversed a regulation from the first Trump administration that was, in parts, anti-ESG.
  • The Trump administration is expected to reinstate a regulation similar to the one from its first administration.
  • Fiduciaries of ERISA-governed retirement plans manage the risk of  the conflicting political views by focusing (i) on selecting and retaining investments with superior risk and return profiles and (ii) on the criteria used by the investment managers of their funds.

This article is, in large part, an unfortunate story about the perils of politicians and their use of the regulatory system to accomplish political objectives.

For decades, Republican and Democratic administrations engaged in a tug-of-war on the use of certain factors for the selection and monitoring of plan investments. Think of ETI—economically targeted investments; SRI—socially responsible investments; and ESG—environmental, social and governance factors.

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Things I Worry About (13): Every Plan Commits Prohibited Transactions and the Cornell University Decision


408(b)(2), fiduciary, prohibited transaction
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Key Takeaways

  • When an ERISA governed retirement plan engages and pays service providers, such as advisors and recordkeepers, it commits a prohibited transaction.
  • However, if the plan fiduciaries satisfy the conditions of an exemption (which, in this case, would be the 408(b)(2) statutory exemption), the prohibited transaction is exempt, that is, it becomes permissible.
  • If the conditions of the exemption (e.g., reasonable arrangement and reasonable compensation) are not satisfied, the plan fiduciaries have engaged in a nonexempt prohibited transaction that can be the basis for an adverse finding in a DOL investigation or the basis for a lawsuit.
  • The recent Supreme Court decision in Cunningham v. Cornell held that the burden of proof for determining whether the conditions of 408(b)(2) were satisfied are on the plan fiduciaries, meaning that plaintiffs’ attorneys can simply allege that the fiduciaries hired service providers and then the fiduciaries must prove that they satisfied the conditions of the exemption.

In an ERISA fiduciary breach lawsuit, plaintiffs’ attorneys must allege actions by fiduciaries that violated the law’s fiduciary standards and then, at trial, they must prove those facts. However, the Supreme Court’s decision in Cunningham v. Cornell University turns that process on its head by holding that the burden of proof for an exemption from prohibited transactions is not on the plaintiffs, but instead is on the defendants—the plan fiduciaries. As a result,  lawsuits that allege prohibited transactions are more likely to proceed to trial and perhaps increase the risk of loss for plan fiduciaries. More on this later in the article.

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Things I Worry About (11): DOL Cryptocurrency Guidance Withdrawn


DOL, investment adviser
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Key Takeaways

  • The Department of Labor’s Employee Benefits Security Administration (EBSA) issued Compliance Assistance Release (CAR) 2022-01 that caused concerns among plan sponsors and fiduciaries about the use of cryptocurrencies in participant directed plans.
  • On May 28 of this year, the DOL’s EBSA rescinded that CAR. That should have the effect of reducing, but not eliminating, the concerns.
  • This article discusses the two pieces of guidance and the possible outcomes.

The 2022 CAR (2022-01.pdf) had a chilling effect on adding cryptocurrency investments into participant directed plans. The statements in the CAR that raised the most concern were:

  • The Department cautions plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.
  • At this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies. These investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss, …
  • Based on these and other concerns, EBSA expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments. The plan fiduciaries responsible for overseeing such investment options or allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks described above.

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Things I Worry About (10): FINRA Enforcement and Senior Investors (2)


best interest, IRA, reg BI, rollovers, SEC
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Key Takeaways

  • FINRA’s 2025 Annual Regulatory Oversight Report 2025-annual-regulatory-oversight-report.pdf included a focus on issues related to retirees and senior investors.
  • The Report provides guidance to broker-dealers about the priorities of FINRA in its regulation, supervision and enforcement programs for broker-dealers. In other words, it is one of FINRA’s ways of telling the regulated community that it should be paying particular attention to certain issues.
  • Consistent with my focus on retirement plans and retirees, I searched the Report for references to retirement, rollovers, elderly and senior investors. As expected, FINRA did have a lot of concern about those subjects. Here is what I found.
  • While the FINRA Report only directly applies to broker-dealers, the issues and concerns apply to investment advisers as well, but the regulator in that case is the SEC.

This article is a sequel to my last one on FINRA’s 2024 Annual Regulatory Report Things I Worry About (9).

Among other things, FINRA is focusing on services and recommendations by broker-dealers and their registered representatives to retirees, senior investors and investors with diminished capacity.  To state the obvious, the regulator is concerned about the aging of the Boomers in real time.

The Report discusses the application of Regulation Best Interest (Reg BI) to rollover recommendations. Here is what it says in the section on Failure to Comply with the Compliance Obligation:

Failing to have written policies and procedures reasonably designed or enforced with respect to account recommendations, for example, by:

  • not being reasonably designed to address recommended transfers of products between brokerage and advisory accounts or rollover recommendations;…

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Things I Worry About (9): FINRA Enforcement and Senior Investors (1)


best interest, IRA, reg BI, rollovers, SEC
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Key Takeaways

  • FINRA’s 2024 Annual Regulatory Oversight Report 2024 FINRA Annual Regulatory Oversight Report | FINRA.org included a focus on issues related to retirees and senior investors.
  • The Report provides guidance to broker-dealers about the priorities of FINRA in its regulation, supervision and enforcement programs for broker-dealers. In other words, it is one of FINRA’s ways of telling the regulated community that it should be paying particular attention to certain issues.
  • Consistent with my focus on retirement plans and retirees, I searched the Report for references to retirement, rollovers and senior investors. As expected, FINRA did have concerns about those subjects. Here is what I found.

Among other things, FINRA is focusing on services and recommendations by broker-dealers and their registered representatives to retirees, senior investors and investors with diminished capacity.

The Report has one part that specifically focuses Reg BI’s application to plan-to-IRA  and IRA-to-IRA transfer recommendations. Here is what it says. The bolding is mine.

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Things I Worry About (8): DOL Investigations and Unsuspecting Plan Sponsors (2)


best practices, DOL, fiduciary
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Key Takeaways

  • The Employee Benefit Security Administration (EBSA) of the US Department of Labor (DOL) recently released its Fact Sheet: EBSA Restores Nearly $1.4 Billion to Employee Benefit Plans, Participants, and Beneficiaries: ebsa-monetary-recoveries.pdf
  • One of the targets of their investigation is “missing participants”. The DOL refers to that program as the “Terminated Vested Participant Benefits Payments”. Impressively, the EBSA recovered $429,200,000 for participants under that program in the 2023-2024 fiscal year.
  • Plan sponsors/fiduciaries and their advisors would be well-advised to determine whether they have “missing participants” and, if so, take steps outlined by the DOL to address the issue.

As explained in my last post, Things I Worry About (7), the DOL’s EBSA has a number of programs that can restore benefits to plans and participants. Those include:

  • Civil investigations.
  • Criminal investigations.
  • Informal complaint resolutions.
  • Correction programs.

The issue of “missing participants” comes up in civil investigations. In those investigations the DOL examines whether a plan has former employees who left their accounts in the plan and whether the plan continues to provide the legally required disclosures and to ensure that the participants are aware of their benefits. I put “missing participants” in quotes because the definition I broader than it appears. There isn’t a legal definition, but the practical definition is that it is a former employee who left the employment of a plan sponsor, but did not take a distribution of his or her benefits. If plan communications (e.g., emails, mail, disclosures) are sent to a former employee who has benefits in the plan and it appears that the communications were received, the former employee is not “missing.” But, if the emails and mailings are kicked back as undeliverable, the participant is missing.

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ERISA Moments Ep. 31: The Trump Administration Policies for Retirement Plans


ERISA

Take a quick dive into the exciting world of ERISA with Faegre Drinker benefits and executive compensation attorneys Fred Reish and Brad Campbell. In this quick-hit series of updates, Fred and Brad offer a high-level view of current trends and recent ERISA developments. See the newest episode, The Trump Administration Policies for Retirement Plans,  on the Spotlight on Benefits blog.

Watch the video on the Spotlight on Benefits blog.

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Things I Worry About (7): DOL Investigations and Unsuspecting Plan Sponsors


DOL, fiduciary
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Key Takeaways

  • The Employee Benefit Security Administration (EBSA) of the US Department of Labor (DOL) recently released its Fact Sheet: EBSA Restores Nearly $1.4 Billion to Employee Benefit Plans, Participants, and Beneficiaries: ebsa-monetary-recoveries.pdf
  • The Fact Sheet describes the different EBSA programs that can recover money for participants, and the numbers are impressive.
  • However, the Fact Sheet also has specific lessons for plan sponsors, fiduciaries and advisors.

The DOL’s EBSA has a number of programs that can restore benefits to plans and participants. Those include:

  • Civil investigations.
  • Criminal investigations.
  • Informal compliant resolutions.
  • Correction programs.

Civil investigations is the program that most concerns plan sponsors; however, criminal investigations are the most dramatic and can most severely impact the lives of “bad actors.” Last year the EBSA’s criminal investigation resulted in 161 guilty pleas or convictions. The bad acts go far beyond any mistakes that plan sponsors or fiduciaries could reasonably make. Think in terms of embezzlement and theft.

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