DOL Gets It Right on Retirement Plan Investment Options
Millions of Americans rely on 401(k) plans and other workplace defined contribution (DC) retirement plans as their primary path to financial security. For these savers, the investment options available in their plans shape how they build wealth, manage risk, and prepare for retirement. This makes the rules governing how retirement plan fiduciaries choose plan investment options critically important.
The Department of Labor’s (DOL) proposed rule, Fiduciary Duties in Selecting Designated Investment Alternatives, would create an asset-neutral, process-based safe harbor for selecting the investment options available to American savers in their retirement plans. ICI strongly supports this approach because it recognizes an important principle under the law: retirement plan decisionmakers should be able to act in their discretion to evaluate investments on their merits, without the government putting a thumb on the scale. This matters as policymakers look to broaden the investments available to retirement savers while helping plan fiduciaries as they evaluate potential plan investments consistent with their duties under ERISA to act prudently and solely in the interests of plans and their participants.
The proposed rule will reduce regulatory uncertainty by providing clarity to plan fiduciaries as they consider new plan investments that can help retirement savers invest for a successful retirement. This includes professionally managed diversified funds with allocations to private-market assets such as private equity, real estate, and infrastructure. These asset classes have long been used by institutional investors such as defined benefit plans and foundations to improve performance as part of professionally managed investment portfolios. But the many American workers who save through DC plans have not had these same opportunities.
DC plan fiduciaries should be free to consider whether an investment option is prudent based on their judgment. Fiduciaries should not be forced to operate under the fear that offering a particular asset class will invite hindsight second-guessing and costly, often meritless litigation, even where exposure to these assets can be prudently made available in a DC plan through a professionally managed, diversified investment option.
While we support the proposed rule and its goals, we believe that targeted changes to clarify the rule and its application would make it even more effective. To this end, ICI is urging DOL to make clear that the safe harbor is optional and is not the only way for a fiduciary to satisfy its prudence obligations, so that plan fiduciaries and other parties do not misinterpret it as the required process for every investment decision. Without this clarification, helpful guidance could become a set of rigid obstacles that discourages many beneficial plan investments. This also applies to the examples included in the rule. These examples should not become the de facto range of permissible applications of the safe harbor. To avoid this happening DOL should make clear, as with the core principles of the rule, that the examples are merely illustrative and are not the only means to satisfy the safe harbor.
ICI also recommends other changes to ensure that the final rule preserves asset neutrality and investment vehicle neutrality. In addition to clarifications to reinforce the final rule’s asset neutrality, we also recommend DOL clarify both in the rule text and in the examples that the rule can be applied neutrally to the range of products and structures that retirement plans actually use, including mutual funds, collective investment trusts, and other investment vehicles, while still recognizing the unique features of these different products.
DOL properly recognizes that ERISA prudence is rooted in process, not hindsight, and that it is not the government’s job to dictate plan investments. With targeted refinements, the final rule can give plan fiduciaries greater confidence to evaluate a wider range of investment options while preserving the strong protections retirement savers expect and deserve.