A recent executive order from President Trump seeks to reshape the retirement landscape by opening the door to alternative assets for 401(k) and defined contribution plan participants. While the move promises greater diversification and potential long-term gains, it also introduces new complexities and risks. Here’s what plan sponsors and fiduciaries need to know.
New investment horizons
On Aug. 7, President Trump issued an executive order, Democratizing Access to Alternative Assets for 401(k) Investors (opens a new window). The order aims to make alternative investment options — including private equity, real estate, and digital assets — available to participants in 401(k) and defined contribution plans regulated under the Employee Retirement Income Security Act of 1974 (ERISA).
The executive order directs the Department of Labor (DOL) to clarify its position on alternative assets and the process by which such assets would be offered in plan funds, and re-examine and adjust related guidance for plan fiduciaries. Specifically, the DOL is instructed “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.”
The DOL is also directed to consult with the Treasury Department, Securities and Exchange Commission (SEC), and other regulators to determine if regulatory changes at those agencies are also needed. The SEC is specifically directed to “consider ways to facilitate access to investments in alternative assets by participants in participant-directed defined-contribution retirement savings plans.”
The new executive order follows years of back and forth on this topic. In 2020, the first Trump administration issued guidance that 401(k) investments in private equity funds were permissible. In 2021, however, the Biden administration — while not rescinding the Trump administration guidance — cautioned against endorsing or recommending such investments.
More options, more risks
The Trump administration believes that offering alternative asset investments is an extension of the basic fiduciary obligation to provide plan participants with diverse investment options. Although nothing currently prohibits plan sponsors from offering these assets as investment options, they were historically viewed as being riskier than traditional defined contribution plan investments, such as publicly traded stocks and bonds.
Many plan participants will likely welcome more diverse investment options. They should, however, proceed with caution and rely on professional advice about adapting their investment strategy without overexposing their investment portfolios.
For plan sponsors and fiduciaries, meanwhile, the order is likely to make their roles and the process of selecting investment options more complicated. It could also make plan administration more costly. Sponsors and fiduciaries may find themselves between a rock and a hard place: While some participants will find fault with the mere fact that riskier investments will now be available, others might question sponsors that elect not to make such options available.
In considering new investment options, plan sponsors will need to pay particular attention to the fees associated with them, which could be substantially different from those of traditional investment options and thus could expose them to greater risk, including litigation alleging that fiduciaries have paid excessive fees to service providers or failed to control/monitor such fees.
Sponsors must also be mindful that many of these new investment options are less liquid, making hardship withdrawals more difficult. In addition, accounting treatment for these types of investments may differ and be less certain than traditional options.
Plan sponsors may need to perform additional due diligence as they potentially offer these assets as investment options. Ensuring their offerings are compliant and that they are making appropriate disclosures may require sponsors to engage outside opinions, obtain additional data, and form new committees.
For now, no action from sponsors and fiduciaries is required, as rulemaking by the DOL, SEC, and others could take some time, stretching into 2026 or possibly beyond. Several factors could slow implementation of the executive order, including potential legal challenges and other administration priorities taking priority. A future presidential administration could also choose to reverse course on this issue.
Despite this uncertainty, it’s vital that sponsors and fiduciaries consider how insurance may apply and begin to consider how they may mitigate potential risks.
Insurance and risk considerations
Fiduciary liability insurance is designed to protect fiduciaries against claims alleging mismanagement, negligence, or breaches of fiduciary duty in the administration of employee benefit plans, trusts or other fiduciary responsibilities. Fiduciary liability policies can protect both individual fiduciaries and organizations sponsoring plans, typically providing coverage for legal defense costs, settlements, and judgments.
Fiduciary liability policies could provide coverage for many of the risks sponsors and fiduciaries may incur as alternative investment options become available to plans. Insurers, however, may seek to restrict coverage by pushing for lower limits and higher retentions, or imposing outright exclusions for claims related to these asset classes.
Although a fiduciary liability policy would typically be the first line of defense to this new exposure, organizations should be mindful of risks that could trigger other forms of coverage. In other countries and jurisdictions that have permitted similar plan investments into alternative assets — notably, digital assets — plan sponsors, fiduciaries, and senior company executives have seen an uptick in claims under:
Errors and omissions (E&O) policies alleging that sponsors and fiduciaries have not made appropriate disclosures about or performed rigorous due diligence when choosing investment advisors.
Directors and officers liability (D&O) policies alleging that senior executives should have developed better processes for managing and overseeing plan investment decisions.
Similar to fiduciary liability, many D&O and E&O insurers in regions where investments in alternative assets have been permitted have used exclusionary language to mitigate their potential risks.
Sponsors should work with their insurance brokers to prepare for potential scrutiny from underwriters, who will want to ensure all fees associated with alternative investment options are fully understood and disclosed in accordance with fiduciary duties under ERISA and related regulations, and that sponsors and boards understand their responsibilities to plan participants and investors. Sponsors that choose to add or are considering adding new asset classes as investment options for plan participants should be prepared to provide underwriters with information regarding their due diligence processes.
Sponsors should also work with their insurance brokers to:
Ensure fiduciary liability and other management liability policies have adequate limits and retentions.
Add settlor extensions to policies, which can provide coverage for individuals responsible for making strategic decisions for plans — for example, regarding their setup, design, amendments, or terminations.
Push back against potential exclusions insurers seek to add.
Beyond optimizing their insurance coverage, sponsors should set up internal committees or boards to review and approve all benefit options, including those into private equity funds and digital asset options. Sponsors should regularly conduct RFPs to ensure third-party providers’ fees are priced competitively, supported by market data. And they should ensure they are being advised by the right sources, including outside counsel and investment advisors who can fully vet their decisions.
