Updating Rules for Modern Retirement Investing

Today’s 401(k) plans offer access to a far broader range of professionally managed investment funds than policymakers envisioned when many of the rules were first developed under the Employee Retirement Income Security Act (ERISA), the federal law governing workplace retirement plans and protecting retirement savers. Despite this progress, a rule from 1977 known as Prohibited Transaction Exemption (PTE) 77-4, which allows a retirement plan to invest in funds managed by the same firm advising the plan, still operates largely as if traditional mutual funds remain the dominant retirement investment option. The Department of Labor (DOL) should update PTE 77-4 to cover a wider range of investment vehicles.

ERISA’s prohibited transaction rules are intended to ensure that plans are managed solely in the interest of participants and their beneficiaries, but retirement plans also need practical exemptions to operate effectively. For example, when a firm advising a retirement plan includes one of its own investment funds in the plan’s lineup, ERISA treats the arrangement as prohibited. PTE 77-4 allows retirement plans to use those affiliated investment funds as options. But because the exemption only applies to open-end registered funds, like mutual funds, other professionally managed investment vehicles offered by the same firms often fall outside its scope. In particular, this includes investment options with exposure to alternative assets, like certain closed-end funds and business development companies.

This issue is particularly timely as the DOL considers ways to expand access to a broader range of assets within 401(k) retirement plans.

Updating PTE 77-4 would better align the exemption with today’s marketplace. It would give managers greater flexibility to offer plan participants diversified, professionally managed strategies—including those with private market exposure—within the familiar and well-understood ERISA compliance framework of PTE 77-4. It would also reduce reliance on a patchwork of individual exemptions, reducing legal and administrative friction.

At the same time, expanding the exemption would not mean lowering standards or weakening investor protections. Instead, it would provide access to a broader range of investment options. More choice when paired with strong fiduciary oversight can support better diversification and long-term investment opportunities.

ERISA’s duties of prudence and loyalty would continue to apply fully to retirement plan fiduciaries evaluating these investments. In addition, PTE 77-4 should continue to require detailed disclosure, independent fiduciary oversight, and prohibitions on duplicative fees and sales commissions. Expanding the exemption’s scope would allow these protections to apply across a broader set of products. Incorporating features already used in individual exemptions, such as electronic disclosure, could further simplify compliance.

Expanding PTE 77-4 to cover all fund types would help carry out the President’s Executive Order on expanding investment choice for retirement savers while preserving ERISA’s longstanding fiduciary protections. Under the leadership of Acting Secretary Sonderling, the Department of Labor is taking steps to clarify how plan fiduciaries can responsibly offer investment options with exposure to alternative assets in retirement plans. Updating PTE 77-4 would build on that effort.