Members voice reluctance to put private assets in 401(k) plans despite possible legal cover from a proposed DOL rule.
A rule proposed Monday by the Department of Labor could make it more likely that some corporations sponsoring defined contribution retirement plans eventually decide to offer options that include alternative investments such as private equity and private credit. But responses from several members of NeuGroup for DB and DC Plan Management responsible for 401(k) plans indicate corporates will not be racing to include alternatives even if the rule becomes final after a 60-day comment period. - “We don’t have any plans to include alternative investments in our DC plans regardless of the DOL rule,” one member told NeuGroup Insights. “We keep our core plan lineup simple and low cost, and then provide a brokerage window that participants can utilize for anything outside the core lineup.”
- Said another, “We are still in the process of parsing the proposed rule; but short of a mandate, we continue to be reluctant to add these investments because of their complexity, illiquidity and opaqueness.”
- A third member observed, “I don’t see this having much of an impact—we carefully select our investment options and are very thoughtful when it comes to changing any offerings.”
- If other plan sponsors take the plunge first and report positive outcomes or if investment managers recommend it, this company may consider adding alternatives. “But at this point it is business as usual.”
Costs and legal risk. Other DC managers expressed interest in the DOL’s proposal but also made clear that their companies will not be first adopters in a field rife with lawsuits. “I would expect this to be a slow progression, especially given the extensive 401(k) litigation environment,” one member said.
- Another agreed. “I do not expect this to happen quickly nor would I expect us to lead,” he said. “We have a big DC lineup review in 2026 and probably won’t take on another for three to five years. While we will actively study the role of privates, I do not suspect we will be ready to make any near-term changes. The primary concern is legal risk.”
- He said “cost creep” is another potential issue. “We are highly driven by running a very low-cost 401(k) plan—always aiming for top decile. So if privates come with higher costs, we just need to be ready to weigh the longer-term implications of that. Perhaps the juice is worth the squeeze. We shall see.”
Alternatives in target-date funds. Target-date funds—which are the default investment option in many plans—may offer a way to offer alternative investments that plan sponsors could accept. “We remain open-minded about if/how alternative investments could be woven into a TDF solution,” one member said.
- Another said, “I think once the rule is finalized it will take a while in practice for fiduciaries and their advisors to evaluate and determine if there are particular investments which are appropriate to be offered—on their own or, more likely, as part of a diversified investment offering—which will be beneficial for their plan participants given all the factors that need to be considered.”
Being a responsible plan sponsor. Including a small sliver of alternative investments within a larger, diversified investment vehicle like a TDF is the only responsible way for a plan sponsor to add private assets in a DC plan, according to Todd Thorsen, ex-head of global investments at Medtronic (and a former NeuGroup member). “I would always worry if I had a standalone alts option that’s not wrapped inside a bigger allocation,” he said. - “That's where you're going to get hot money in and out and really exacerbate liquidity challenges and pricing challenges of alternative assets,” he added. “You do not want individual participants making that sort of decision. The average investor is not capable of understanding what's going on in those asset classes. So that's why we would only do those alts inside a broader mandate.”
- Mr. Thorsen, who had experience with private investments overseeing Medtronic’s defined benefit plan before overhauling the 401(k), cautioned that managers without similar experience should carefully consider the risks presented by assets like private equity or credit—even if the DOL rule provides some legal protection.
- “If I were on a team that ran a 401(k) plan and had never dealt with private equity, had never dealt with some of these other asset classes, I wouldn't touch it because you don't know what you're getting into,” he said. “If you don't have any experience, your consultant’s going to tell you to go to big name, publicly-traded private equity managers.” The problem:
- “I don't think those guys are going to outperform the public markets, let alone after fees. I think it's just too hard.” And that, he says, may present legal risk—no matter what the DOL rule states. “They can’t relieve you of your fiduciary duty.”
- Worst case scenario: Imagine that you, the sponsor, allow 70% of the plan’s assets to flow into private equity. “You can say the Department of Labor says it’s ok,” Mr. Thorsen said. Then a financial crisis hits and you can’t sell illiquid assets. “You’re still getting sued—and you still probably violated your fiduciary duty.”
