Don’t Let Politics Sway Decisions Over Private Markets in DC Plans

Jason Levy

Lisa Gomez

Helping Americans achieve a financially secure retirement is not a uniquely Democratic or Republican goal—it’s a shared goal of thoughtful policymakers, regardless of political party. Yet, as our country has become increasingly polarized, retirement policy has too often become collateral damage, with headlines and talking points crowding out legal requirements and sound fiduciary judgment.  

That noise ultimately hurts the very people the Employee Retirement Income Security Act of 1974 was designed to protect—retirement savers. It also complicates decisionmaking for plan fiduciaries and advisers who are interested in responsibly considering innovative products and services that could benefit participants, but who must operate against a backdrop of shifting political narratives.  

Investment decisions, by their nature, play out over extended time horizons and often outlast the administrations that influence retirement policy debates, making stability in the underlying governing legal framework essential. While retirement policy debates often track broader political divisions, the question that ultimately matters to plan participants is far simpler: whether the decisions made on their behalf will support long-term financial security.  

Take the example of false narratives about environmental, social, and governance considerations in retirement plan investing. It was regarded as gospel that, during the first Trump administration, the Department of Labor prohibited ESG-related investing, but then required it during the Biden administration. In reality, under both administrations, ESG rules followed ERISA’s core fiduciary principles: the duties of prudence and loyalty. Plan fiduciaries were always supposed to focus on relevant risk-return factors in making investment decisions and only consider ESG factors when relevant for that purpose. The ESG debate shows how easily ERISA’s stable fiduciary framework can be obscured by political narratives that have little to do with the statute itself. 

In the wake of President Donald Trump’s executive order on “democratizing” access to alternative assets for defined contribution plans and related agency action, we are concerned that debate over adding private market exposure will focus more on political narratives than legal standards and investment considerations. Fiduciaries may reach different conclusions about whether such investments should be included in their plan lineups, but the related policy debate should be rooted in the law and not the following five politicized myths. 

Myth #1: An Executive Order Can Change ERISA’s Fiduciary Investment Standard 

The ERISA fiduciary investment is both strict and well-established. Fiduciaries must act prudently and solely in the interest of plan participants, with the exclusive purpose of maximizing risk-adjusted returns, regardless of whether an investment includes public or private market assets. The executive order on alternative assets and related agency action cannot—and will not—alter the standards for selecting and monitoring investment options within a plan lineup. 

Myth #2: 401(k) Plans Are Now Required to Offer Private Market Investments 

Executive action cannot mandate, compel, or newly “open the door” to private market exposure in 401(k) plans. ERISA has never categorically prohibited investments, including those with private market components. Even before the executive order, if a responsible fiduciary conducted a prudent evaluation process and reasonably determined that an investment with private market components met the ERISA standard for that plan, that option could be added to the plan.  

Myth #3: Participant Demand Determines What Belongs in a 401(k) Lineup  

A 401(k) plan lineup is not crafted based on a survey of participant preferences. Any ERISA investment decision must consider all relevant facts and circumstances. Investments with private markets exposure raise unique issues (e.g., liquidity, transparency and valuation) that should be evaluated as part of that determination. 

Basing an investment with private market exposure on whether plan participants are asking for it is not the law—and it would make for deeply problematic retirement policy. If participant demand were the final word, plan lineups would be chock-full of the latest fads or based on political winds of the day, and American financial retirement security would suffer. ERISA requires fiduciaries to exercise independent judgment, not delegate investment decisions to participant—or political—sentiment. 

Myth #4: ERISA Requires Fiduciaries to Select the Lowest-Cost Investment Option 

Investments with private market exposure will cost more than investments consisting of components that passively track an index. Many critics of investment in private markets warn of the fees involved. While cost is certainly an important and relevant factor, it should not be considered in isolation.  

A responsible fiduciary may select a higher-cost, actively managed fund if, after a prudent process, it is determined that the investment meets ERISA standards. The same analysis applies to an actively managed private market component. Courts have consistently recognized that higher fees are not imprudent where fiduciaries reasonably conclude they are justified by expected net performance or diversification benefits. 

Myth #5: Political Considerations Should Drive Investment Decisions  

Like ESG and other hot-button retirement-policy topics, private market access is generating sensational media attention. The question is not whether plan fiduciaries and their advisers may consider such investments—it is how they do so. They need to focus on the law, build prudent processes that withstand scrutiny and make decisions grounded in participant outcomes, rather than being influenced by headlines. 

American workers saving for retirement certainly hold a wide range of political views, but they all expect fiduciaries to remain focused on whether their decisions improve the likelihood of a secure retirement. Fiduciaries who keep that singular focus will fulfill both the letter and the spirit of ERISA and best serve the workers who depend on them. 

Lisa M. Gomez is the former Assistant Secretary of Labor for Employee Benefits Security and is the president and founder of LMG Collaborative Consulting Solutions LLC. Jason Levy is a senior counsel at Great Gray Trust Co. 

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.