News

Traditionally, 401(k) plans have limited their investment lineups to public equities, fixed income, and similar investment options.

More recently, however, there has been growing interest in alternative, non-traditional investments as a means for enhancing diversification and improving long-term risk-adjusted returns.

These alternative investments, while potentially lucrative, also pose concerns regarding transparency, complexity, illiquidity, higher fees, and increased regulatory and legal risks.

Here’s a brief look at what new and pending guidance may mean for plan sponsors.

The Executive Order

In August, the White House issued an Executive Order titled “Democratizing Access to Alternative Assets for 401(k) Investors.”

This Order defines alternative assets to include:

• Private market investments not publicly traded
• Real estate (including debt instruments secured by real estate)
• Actively managed vehicles investing in digital assets and commodities
• Projects financing infrastructure
• Lifetime income strategies

The Order directs the Department of Labor (DOL) to reexamine its current guidance under ERISA on the fiduciary duties tied to alternative assets and, within 180 days, clarify when fiduciaries may prudently include alternative assets in participant-directed plans.

Additionally, the Order tasks the Securities Exchange Commission (SEC) with considering rule changes that create easier access for participant-directed defined contribution plans.

Of note, the DOL, in response to this Executive Order, has rescinded its 2021 guidance on alternative assets, which had cautioned plan sponsors against including these investments in defined contribution plans.

What Plan Sponsors Can Do Now

While new guidance is in process, plan sponsors can begin preparing so they are ready if and when the regulatory pathway emerges for alternative assets — or when these options become available on the market.

Here are some potential action steps:

1. Review Investment Policy Statements and Plan Documents

Determine whether your plan documents allow for alternative investments directly, or through target-date funds or other fund structures.

Consider whether amendments may be needed to authorize alternative assets or to grant flexibility for future authorization.

2. Engage Experts, Consultants, and ERISA Counsel

Seek assistance from specialized legal counsel, investment consultants, and third-party providers who can help assess which types of alternative investment options are feasible, prudent, and consistent with ERISA regulations.

Also begin developing due diligence standards, including criteria for fee structures, liquidity terms, valuation policies, and reporting requirements.

3. Assess Whether Alternative Investments Make Sense for Your Plan

Evaluate whether your plan’s size, governance structure, and participant demographics make alternative assets a good fit.

• Larger plans may have the capacity to handle the complexity of alternative investments.
• Smaller plans may need to consider pooled vehicles.

Determine whether alternative assets will be offered as part of your core investment lineup, as an optional choice for participants, or through brokerage windows.

4. Consider Participant Education and Disclosures

If you choose to include alternative assets in your investment lineup, provide clear disclosures about risks, fees, liquidity constraints, and performance expectations.

Develop educational materials or tools to help participants understand how alternative assets fit within a diversified retirement portfolio.

Looking Ahead

Over the next 6–12 months, plan sponsors should closely monitor revised rules and guidance from both the DOL and the SEC.

This period provides valuable time to:

• Strengthen governance and document decision-making
• Evaluate products and providers carefully
• Establish clear education and protection for participants

Alternative assets may become a valuable addition to 401(k) investment lineups — but prudence is essential. Carefully consider the legal, financial, and reputational risks before implementation.