My last two articles, Things I Worry About (15) and Things I Worry About (16), reviewed  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.

This article focuses on parts of the EO that I believe to be particularly significant.

Before getting into the provisions of the EO, though, I should point out that an executive order is not law. In fact, it’s not a regulation or even subregulatory guidance. Instead, this type of EO simply directs an agency to review a matter and to provide guidance. That means that the work will be done by the agency and not by the White House.

The EO makes an extraordinarily broad statement about the White House’s position on the inclusion of alternative assets in 401(k) plans.

Sec. 2. Policy. It is the policy of the United States that every American preparing for retirement should have access to funds that include investments in alternative assets when the relevant plan fiduciary determines that such access provides an appropriate opportunity for plan participants and beneficiaries to enhance the net risk-adjusted returns on their retirement assets.

Comment: As a practical matter, that should likely be seen as a political statement. Any future regulations or guidance will be much most subtle and consistent with ERISA’s fiduciary standards—the prudent person rule and the duty of loyalty to participants and beneficiaries.

With regard to the implementation of that policy, the EO has two general directives. The first is about existing guidance:

Within 180 days of the date of this order, the Secretary of Labor (Secretary) shall reexamine the Department of Labor’s past and present guidance regarding an amended (ERISA) (29 U.S.C. 1104), in connection with making available to participants an asset allocation fund that includes investments in alternative assets. When conducting this reexamination, the Secretary shall consider whether to rescind the Department of Labor’s December 21, 2021, Supplemental Private Equity Statement. [Bolding added by me]

Comment: This directs the DOL to look at existing guidance. There were only two pieces of guidance that directly addressed private funds….a DOL Information Letter from the first Trump administration, 06-03-2020.pdf, and (SDOL Supplemental Statement referenced in the EO, U.S. Department of Labor Supplement Statement on Private Equity in Defined Contribution Plan Designated Investment Alternatives | U.S. Department of Labor

Shortly after the EO was issued, and in response to the EO, the DOL rescinded the Supplemental Statement. (See US Department of Labor rescinds 2021 supplemental statement on alternative assets in 401(k) plans | U.S. Department of Labor)  While the Supplemental Statement questioned the ability of most plan sponsors and fiduciaries, and particularly the fiduciaries of plans of small employers, the recission is of little legal effect.

As a result, the prevailing authority is the 2020 Information Letter, which is sub-regulatory guidance and thus, while it provides the DOL’s views, it has little legal effect.

With regard to another “alternative asset”, cryptocurrencies, the Trump DOL had already rescinded the Biden DOL’s cautionary guidance on crypto. (The rescission, Compliance Assistance Release No. 2025-01 | U.S. Department of Labor, and the Biden era guidance, Compliance Assistance Release No. 2022-01 | U.S. Department of Labor.)

Another important observation about the quoted language is that the direction to the DOL is to review the inclusion of alternative assets in plans as part of an asset allocation vehicle, and not to review the inclusion of alternative assets as standalone investment options.

The EO’s second  directive to the DOL is to consider issuing new guidance:

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. Such clarification must aim to identify the criteria that fiduciaries should use to prudently balance potentially higher expenses against the objectives of seeking greater long-term net returns and broader diversification of investments. [Bolding added by me]

Comment: This second directive is also focused on asset allocation funds—as is the EO, and not on standalone investments in alternative assets. It simply directs the DOL to clarify its positions. I expect this to be, by and large, similar to  the 2020 Information Letter.

The second directive continues:

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.

Comment: Again, the focus is on asset allocation funds including alternative assets. This part of the directive, though, directs the DOL to propose guidance or regulations on fiduciary duties for selecting the asset allocation funds. Since the focus is on asset allocation vehicles, this guidance would likely say that fiduciaries should prudently evaluate the experience and capabilities of the manager of the asset allocation fund and, in particular, the manager’s experience and capabilities about investing in alternative assets. In other words, plan fiduciaries should obtain and review information about the manager’s experience, success, staff support, etc., in allocating portions of portfolios to alternative assets and in selecting the particular alternative funds or other vehicles to fill those allocations.

The second directive continues:

In carrying out the directives in this section to further the policy set forth in this order, the Secretary shall prioritize actions that may curb ERISA litigation that constrains fiduciaries’ ability to apply their best judgment in offering investment opportunities to relevant plan participants. 

Comment: This might be the most interesting part of the directive, at least from a legal perspective. ERISA is clear that fiduciaries must act prudently (at the level of a person who is “familiar with such matters”) and with a duty of loyalty to participants and beneficiaries. The DOL does not have the authority to override that. As a result, if the DOL attempts to provide a fiduciary “safe harbor” for selecting alternative assets, that safe harbor would likely be set aside by the courts. On the other hand, the DOL could express its views on what a prudent process might look like and perhaps even provide a checklist as a tool. But it would be unrealistic to expect the DOL to provide guidance or a regulation that specifies steps that would lead to automatically deemed fiduciary compliance (e.g., something like the checklist for the safe harbor for selecting an insurance company in SECURE 1.0). Since the EO was issued by the White House, the DOL will need to provide some helpful guidance, though. As a possible window into the future of this, take a look at the 2020 Information Letter linked earlier in this article.

Concluding Thoughts

In my view, the DOL’s 2020 Information Letter is the first chapter in this book. The EO is the second chapter. But the plot is still developing. There are more chapters to come.

Having said that, it seems inevitable to me that products that include alternative assets (such as CIT target date funds) and services that include alternative assets (such as managed accounts) will emerge over the next 6 to 12 months. The unanswered question, though, is whether plan fiduciaries will embrace those services and products in the foreseeable future. I suspect that, with regard to target date funds, plan fiduciaries will be trusting of the managers of those funds and there will be little, if any, push back. So, on that account, the question, is whether the largest target date fund providers will add alternative assets to their CIT TDFs. (I limit my comments to target date funds in collective investment trusts, as I understand that, under the securities laws, changes are needed for target date mutual funds will need relief before they can include illiquid funds in their allocations.)

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