Advisors: DOL’s Alts 401(k) Rule Won’t Mean ‘Immediate Adoption’
According to data put out Tuesday by Wolfe Research, private credit flows moderated last month “amid growing credit concerns.” Just don’t tell that to the U.S. Department of Labor.
On Monday, the regulator released a long-awaited rule proposal to ease the path for private market investments and other alternatives into everyday Americans’ 401(k) retirement plans, which are often set up as default investments chosen by their employer.
Industry commentators will have about 60 days to weigh in on the proposal, with asset managers and financial advisors largely championing the move to further safeguard them not just from regulators, but also from rampant litigation that often targets plan sponsors and, sometimes, their fiduciary advisors.
That said, advisors focused on the employer retirement plan space all suggested pumping the brakes on thinking there will be fast, widespread adoption of private market investments and other alternatives in the $14 trillion 401(k) market. The proposed rule, if passed, would make conversations with plan sponsors and their advisors about alternatives more likely, but adoption still hinges on several fiduciary factors and considerations, according to the industry players.
Peter Ruffel, senior manager, defined contribution, with Raleigh, N.C.-based Captrust, said the rule, if passed in a similar form, could give plan sponsors more confidence in investment selections beyond just alternatives, in a litigious environment for retirement plans.
“A lot of the factors that the DOL called out are not novel in terms of performance, fees and benchmarking,” he said. “These are all factors that plan sponsors have been using as part of their mosaic. … I think what it does is broaden and underscore what fiduciaries have already been doing to provide more certainty.”
Ruffel said advisors at Captrust have been speaking with plan sponsors about alternative investment options for years, but have generally not seen much serious interest, partly due to litigation fears. He doesn’t anticipate a rule, even when passed, would have any kind of “huge, immediate impact within the next 12 months.” But he does see it forwarding conversations and education.
“I expect we’ll be having more conversations from a product standpoint,” he said. “There will be more to evaluate, more to consider, and I suspect plan sponsors will be ready to have much more thoughtful conversations around what they can offer participants.”
Ruffel said Captrust advisors are skilled at using alternatives, including private markets, in defined benefit pension plans for upper-high-net-worth wealth clients. Now that the conversation has shifted to broader retirement plan adoption, the RIA will work through industry groups such as the American Retirement Association to provide comments and guidance to the DOL.
Joel Shapiro, head of New York City-based Wealthspire’s retirement advisory practice and a former practicing ERISA attorney, emphasized that the proposed rule is not advocating for alternatives to be used in all 401(k) plans, but it gives plan fiduciaries a path to do so if they determind it’s worthwhile.
“The proposed rule does not suddenly make alternatives broadly appropriate for every plan,” he said. “The proposal is meaningful in that it expressly provides a prudent safe harbor for selecting designated investment alternatives, including asset-allocation funds with alternative assets, and it is clearly intended to reduce regulatory burden and litigation risk around thoughtful plan design.”
Shapiro said the decision to include alternatives in defined contribution plans revolves around questions of “fiduciary process, product design, liquidity, valuation, fee and participant fit.”
“We believe the proposed rule reinforces that view by centering the analysis on risk-adjusted returns net of fees, liquidity, valuation, benchmarking and fiduciary competence rather than giving a blanket substantive endorsement of private assets,” he said. “The safe harbor may lower the temperature, but it does not lower the fiduciary standard.”
Overall, Shapiro called the rule an “important development” in making alternatives “more discussable, if not automatically more advisable.” But he does not see it fundamentally changing how Wealthspire advisors evaluate them for their clients.
“We are neither looking to force alternatives into plan design for the sake of novelty, nor avoid them due solely to that same reason,” he said. “We are evaluating the evolving product set, particularly professionally managed vehicles such as target date suites or similar diversified products or services, and we will consider them where the facts support a prudent case for participants.”
Dan Bruns, director of retirement strategy for Creative Planning, said the proposed rule provides additional security and a regulatory framework for plan sponsors. However, he emphasized that adoption will still depend heavily on resolving key structural issues—liquidity, transparency, fee structures and operational complexity—as well as on determining the appropriateness for specific participant populations.
“What we saw over the past 48 hours … really gave a little bit of additional security,” Bruns said. “Obviously, anytime you get a regulatory framework to support this, it’s going to be a directionally positive movement for plan sponsors. It’s going to help those fiduciaries feel more comfortable. But I still think that adoption for these major employers is going to depend on liquidity and transparency and fee structures and the operational complexity. … Is this even appropriate for my participant population?”
Bruns said Creative Planning already has some plan sponsor clients with defined contribution plans that include private market funds. There are other plan sponsors in the market, however, who lack a basic understanding of how they work or whether they are right for their participants.
“There’s still a big gap in knowledge out there,” he said. “It’s critical for independent advisors to help fiduciaries understand the pros, cons and population-specific appropriateness.”
That’s particularly the case, he said, when there are wholesalers and others suggesting alternative investment options when it may be in their interest to sell them.
The knowledge gap, along with continued fears of being sued for incorporating what may be more fee-heavy private-market options, will likely lead to slow, steady uptake over time.
“No one wants to be first, but no one wants to be last, either,” Bruns said.