On Monday, the Department of Labor’s Employee Benefits Security Administration (EBSA) released proposed regulations intended to ease retirement plan sponsors' use of alternative forms of investments in employee defined contribution retirement plans. Alternative investments include cryptocurrency, private equity, real estate, commodities, and other asset classes traditionally excluded from employee retirement plans. While current rules do not prohibit plans from offering these investment options, most plans have hesitated from adding alternative investments in light of fiduciary concerns and due to perceived regulatory and litigation risk.

Last year, President Donald Trump issued Executive Order 14330 directing the DOL to reexamine its approach toward holding plan fiduciaries legally responsible for including these classes of investments. The new EBSA rules do not encourage use of any particular investment option but establish six process-based steps that plan fiduciaries can follow in an effort to benefit from a "safe harbor" that could provide some protection from later claims that they did not adequately assess risk and other factors associated with any investments included in the retirement plan.

The six factors for plan fiduciaries to consider are: performance, fees, liquidity, valuation, performance benchmark, and complexity. If these steps are followed, the class of assets chosen for the plan is not relevant to the fiduciary investment decision. This change is intended to encourage plan sponsors to review and potentially add alternative classes to their investment array. However, although the proposed rule does not prohibit stand-alone alternative investments as part of a retirement plan’s investment menu, the EBSA release does seem to focus on their use as part of a multi-asset investment vehicle (for example, target date funds).

Despite these changes, plan fiduciaries may continue to be wary over adding investments that appear to involve volatility typically considered inappropriate for an employee retirement plan. The safe harbor does not prevent plan participants from challenging fiduciaries' selection of investment options. Also, the U.S. Supreme Court’s elimination of Chevron deference means that federal courts will not defer to EBSA’s interpretation of these fiduciary duties. While the rules may signal what DOL considers to be appropriate measures to evaluate investment options, plan participants dissatisfied with their performance could still seek legal redress. EBSA is accepting comments on the proposed rule for 60 days.

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