Key Takeaways
- • The Department of Labor's Employee Benefits Security Administration proposed a safe harbor rule featuring a non-exhaustive six-factor test for 401(k) fiduciaries evaluating alternative assets including private equity and cryptocurrency, but prominent ERISA plaintiffs' attorneys view it as creating significant litigation exposure rather than comprehensive liability protection.
- • Jerry Schlichter, founding partner of ERISA plaintiffs firm Schlichter Bogard LLC, warned that fiduciaries pursuing alternative assets face "peril" due to heightened process and monitoring requirements that constitute an "onerous task" under the proposal.
- • Fee reasonableness represents the primary litigation flashpoint: managed alternative investments like private equity charge substantially higher fees than public market options, and failure to justify those costs as reasonable and necessary exposes plan sponsors to participant lawsuits under ERISA.
- • The safe harbor's process-driven architecture places heavy documentation burdens on fiduciaries; Karen Brandon of Ogletree Deakins emphasized that thorough record-keeping will be critical, yet certain plan vulnerability areas remain unresolved even with meticulous compliance.
- • The proposed rule faces post-Chevron constitutional scrutiny that could affect its legal durability, adding regulatory uncertainty for plans considering alternative asset adoption.
Summary
The Department of Labor's proposed safe harbor rule governing alternative assets in 401(k) plans is drawing intensive scrutiny from plaintiffs' bar attorneys who view it as fertile litigation ground rather than fiduciary protection. The Employee Benefits Security Administration's framework establishes six factors—framed as non-exhaustive—to guide fiduciary decision-making on including private equity, cryptocurrency, and similar alternatives in retirement plan menus. However, the safe harbor does not provide the comprehensive liability shield that plan sponsors may assume.
According to Jerry Schlichter, founding partner of prominent ERISA plaintiffs firm Schlichter Bogard LLC, the rule creates substantial risk exposure. Schlichter emphasized that companies pursuing alternative assets face considerable "peril" because fiduciaries must adopt fundamentally different processes compared to traditional public market investing. The implementation burden is "onerous," requiring heightened selection and monitoring protocols that defendants in future litigation will need to defend comprehensively. The six-factor test alone does not shield fiduciaries from ERISA claims if they cannot demonstrate rigorous procedural compliance.
Fee exposure emerges as the most pressing litigation vulnerability. Karen Brandon, an attorney in employee benefits at Ogletree Deakins, identified fee reasonableness as the critical weak point. Managed alternative investments, particularly private equity, command substantially higher fees than public market equivalents. If plan sponsors cannot justify those elevated fees as reasonable and necessary given the specific plan's circumstances, they invite participant litigation—a category that already dominates ERISA docket activity. Brandon noted that even strict process adherence may not prevent exposure in fee-related disputes.
Documentation and proof of fiduciary diligence form the foundation of any defense under the proposed rule. Brandon stressed that the safe harbor's process-driven design makes contemporaneous, detailed record-keeping essential. However, vulnerabilities remain in areas the rule does not fully address, leaving sponsors with residual exposure despite good-faith compliance efforts. The proposed final rule will also face post-Chevron constitutional review, introducing additional regulatory uncertainty about its enforceability and scope.
According to Jerry Schlichter, founding partner of prominent ERISA plaintiffs firm Schlichter Bogard LLC, the rule creates substantial risk exposure. Schlichter emphasized that companies pursuing alternative assets face considerable "peril" because fiduciaries must adopt fundamentally different processes compared to traditional public market investing. The implementation burden is "onerous," requiring heightened selection and monitoring protocols that defendants in future litigation will need to defend comprehensively. The six-factor test alone does not shield fiduciaries from ERISA claims if they cannot demonstrate rigorous procedural compliance.
Fee exposure emerges as the most pressing litigation vulnerability. Karen Brandon, an attorney in employee benefits at Ogletree Deakins, identified fee reasonableness as the critical weak point. Managed alternative investments, particularly private equity, command substantially higher fees than public market equivalents. If plan sponsors cannot justify those elevated fees as reasonable and necessary given the specific plan's circumstances, they invite participant litigation—a category that already dominates ERISA docket activity. Brandon noted that even strict process adherence may not prevent exposure in fee-related disputes.
Documentation and proof of fiduciary diligence form the foundation of any defense under the proposed rule. Brandon stressed that the safe harbor's process-driven design makes contemporaneous, detailed record-keeping essential. However, vulnerabilities remain in areas the rule does not fully address, leaving sponsors with residual exposure despite good-faith compliance efforts. The proposed final rule will also face post-Chevron constitutional review, introducing additional regulatory uncertainty about its enforceability and scope.
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