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.”

As that list makes clear, and contrary to much of the publicity about the EO, the Order is not limited to private funds. However, that is certainly where much of the “action” will be.

The EO then directs the Secretary of Labor, within 180 days after the issuance of the EO, to examine existing guidance and develop new guidance about fiduciary responsibilities for investing in alternative assets.

As first blush, that appears to contemplate inclusion of alternative assets in the core lineup of 401(k) plans. That is not the case. This is another example of where the publicity has gotten it wrong. Here are some quotes from the EO (with emphasis added):

“Within 180 days of the date of this order, the Secretary shall further, as the Secretary deems appropriate and consistent with applicable law, seek to clarify the Department of Labor’s position on alternative assets and the appropriate fiduciary process associated with offering asset allocation funds containing investments in alternative assets under ERISA.”

“The Secretary shall also propose rules, regulations, or guidance, as the Secretary deems appropriate, that clarify the duties that a fiduciary owes to plan participants under ERISA when deciding whether to make available to plan participants an asset allocation fund that includes investments in alternative assets, which rules, regulations, and guidance may include appropriately calibrated safe harbors.”

As the quoted language makes clear, the DOL is directed to provide guidance, including a possible fiduciary safe harbor, for asset allocation vehicles that include allocations to alternative assets. That would include, for example, Collective Investment Trust TDFs and managed participant accounts. There is nothing in the EO that directs the DOL to provide guidance  about allowing participants to invest in standalone private funds—contrary to some of the articles you may have read.

If you are interested in getting a better understanding of where the DOL may go with this, take a look at this 2020 DOL Information Letter from the first Trump administration: 06-03-2020.pdf

That Information Letter discusses the inclusion of private equity funds in professionally managed asset allocation vehicles (e.g., CITs). It concludes that ERISA does not preclude such investments and discusses the fiduciary considerations for making the decision. For example, at one point, it says:

“As compared to typical public market investments available in individual account plans, private equity investments tend to involve more complex organizational structures and investment strategies, longer time horizons, and more complex, and typically, higher fees. A typical private equity investment is structured to reflect the longer-term nature of the commitments required to achieve the investment’s objectives. The typical structures also allow the vehicle’s investment professionals to guide the management and operations of the portfolio companies in which the vehicle invests to maximize the returns for investors over a multiyear period during which investors’ ability to redeem or sell to obtain a return of capital may be limited. As compared to public market investments, private equity investments are subject to different regulatory disclosure requirements, oversight, and controls. In addition, valuation of private equity investments is more complex because private equity investments often have no easily observed market value, and there is often an element of judgment involved in valuing each of the portfolio companies prior to their sale by the investment fund or other liquidity event (e.g., initial public offering).”

In other words, liquidity, transparency, valuation and fees are factors that should be considered.

Concluding Thoughts

There is more to come on this story. My next few posts will  add to this one.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.