Expanding Access To Alternative Investments In ERISA Plans—Litigation Risks And Practical Considerations (Podcast)

On this Ropes & Gray podcast, ERISA and benefits partner Sharon Remmer is joined by litigation & enforcement partners, Amy Roy and Dan Ward, to discuss President Trump's recent Executive Order that directs the U.S. Department of Labor and other federal agencies to expand access to alternative assets for 401(k) investors and what the potential ramifications could be for retirement plan sponsors and asset managers from a litigation risk perspective. We have been closely monitoring the significant increase in lawsuits targeting 401(k) and 403(b) retirement plans over the last several years, where plaintiffs have alleged fiduciary defects in the prudence of investment menu design as well as with respect to the monitoring of plan service providers and fees. Using this as a backdrop, our team examines the evolving landscape and how recent case law clarifies key points for plan sponsors to consider should they decide to offer private equity and other alternative assets in their menus. Our speakers discuss practical steps for mitigating risk when offering alternative investments, such as conducting thorough due diligence, providing clear participant disclosures, and maintaining robust documentation of investment decisions.

Transcript:

Sharon Remmer: Hello, and thank you for joining us for this Ropes & Gray podcast. Today, we will be discussing some emerging issues for fiduciaries of ERISA-covered retirement plans to consider as part of their litigation risk management strategy. I'm Sharon Remmer, an ERISA and benefits partner based in New York, and I'm joined by my colleagues, Amy Roy and Dan Ward, who are both litigation & enforcement partners based in our Boston office. Welcome, Amy and Dan—it's great to have you here today.

For those who follow the ERISA space, you're probably well aware of the class action litigation that has been continuously targeting sponsors of 401(k) and 403(b) plans over the last decade. Against that background, the past several months have been quite eventful. In mid-April, the Supreme Court issued its ruling in Cunningham v. Cornell University making it easier for plaintiffs to state a prohibited transaction claim under ERISA, in that they only have to allege the elements of the prohibited transaction—"no more, no less." A few weeks later, the Department of Labor ("DOL") simultaneously announced that (1) on the one hand, it would stop defending the Biden-era ESG rule in that long-running case brought by a coalition of red state attorneys general, and (2) on the other hand, it would rescind its guidance from 2022 that had articulated concerns about adding cryptocurrency to a 401(k) plan investment menu. Fast forwarding a couple of months, at the end of July, the agency issued some new interpretive guidance about pooled employer plans ("PEPs") and an employer's somewhat limited fiduciary responsibilities when participating in one of these plans. And finally, in the coming weeks, we are anticipating that the Department of Labor will cease defending its Retirement Security Rule (a.k.a. the "fiduciary rule" that the Biden administration adopted last year).

If any listeners would like some additional information about these various developments, you can find hyperlinks to our client alerts in the transcript to today's podcast.

• Plan Sponsors Beware: The U.S. Supreme Court Just Eased Requirements to File ERISA Prohibited Transaction Suits (May 2, 2025)
• Trump DOL Withdraws Biden-Era ESG Rule and Crypto Guidance for ERISA Plans (May 30, 2025)
• DOL Sheds Light on the Fiduciary Responsibilities That Arise with Pooled Employer Plans PEPs (July 30, 2025)
• Planning to Take Advantage of Executive Order on Alternatives in 401(k)s: Five Key Takeaways and Five Action Items for Managers (August 11, 2025)

However, the ERISA story that has arguably generated the most attention this year has been President Trump's Executive Order (the "Order") from August 7, which calls for expanded access to private funds and other alternative asset classes for 401(k) plan investors.

Now, while the Order does not substantively change the requirements of ERISA, it marks a significant regulatory shift, because it signals strong federal support for expanding the menu of investment options available to 401(k) participants. The Order directs the DOL to clarify fiduciary duties under ERISA, propose new rules or safe harbors and prioritize actions to curb ERISA litigation that might constrain a plan fiduciary's ability to offer a more diverse range of investment options to plan participants, including alternative investments. There is also a call for collaboration between the DOL, the Treasury and the Securities and Exchange Commission ("SEC") to facilitate broader access, including possible changes to accredited investor definitions.

Now, as I just touched on, in recent years, the threat of litigation has been ever present as plan fiduciaries are selecting and monitoring the menu of investment options under their 401(k) and 403(b) plans. Dan, can you provide listeners with some background on these lawsuits that have targeted plan sponsors?

Dan Ward: Of course, Sharon. As we have discussed in past episodes, there's been a significant increase in litigation under ERISA targeting 401(k) and 403(b) retirement plans in the last several years. This wave of class action lawsuits has focused primarily on allegations that plan fiduciaries have failed to uphold their duties to participants, particularly regarding excessive fees, poor investment choices and underperformance of plan options.

Many of these class action lawsuits have alleged that plans are charging participants unnecessarily high administrative or investment fees, often due to the use of expensive mutual funds or the failure to negotiate lower-cost alternatives. In other instances, plaintiffs have claimed that plan fiduciaries have selected or retained investment options that consistently underperform compared to benchmarks or available alternatives. Furthermore, many plaintiffs have brought claims alleging a failure of fiduciaries to regularly review and monitor plan investments and service providers.

Lawsuits alleging defects in the prudence of menu design and monitoring (including allegations that the investment options were too expensive) have become commonplace, and these cases often settle for relatively large sums. Historically, this litigation risk has made plan sponsors reluctant to offer access to products containing private equity or other alternative assets, which may carry relatively higher fees than the plain-vanilla equities and fixed income options.

Sharon Remmer: In light of everything Dan just described, Amy, how could the Order help reduce the litigation risk for plan sponsors and asset managers who would like to offer these types of products to plans?

Amy Roy: So, while the Order cannot eliminate the risk of getting sued, we do think it should give plan sponsors some comfort in being able to say that access to alternatives reflects the official view of the federal government. Moreover, despite the hundreds of cases that have been brought against plan sponsors in recent years, there's only one resolved case to date that has involved a defined contribution plan that invested in private equity and other alternatives and that's the Anderson v. Intel Corp. Investment Policy Committee case. That case clarified a few important points:

1. Courts focus on whether fiduciaries employed a comprehensive and diligent process, with a documented rationale for investment choices. Allegations of imprudence based solely on underperformance or higher fees, without meaningful benchmarks, are not going to be sufficient.
2. ERISA does not require fiduciaries to always select the lowest-cost investment. Prudence means considering all circumstances, which includes investment aims and objectives, risks and rewards, etc.
3. Deviation from market practice is not, by itself, imprudence under ERISA. Fiduciaries are not required to mimic prevailing industry standards; what matters is a diligent, documented process focused on participants' best interests.

So, in short, the ERISA fiduciary standard is very much process-driven. Courts are not likely to second-guess well-documented, reasonable decisions—even if they involve alternative assets or higher fees—so long as the decision is the product of a sound process, and the rationale is clear.

Sharon Remmer: Now, Amy, you used the phrase, "meaningful benchmarks" just before. Can you elaborate on what that means in this context?

Amy Roy: Sure. Benchmarking fees and performance is a central issue in mutual fund and 401(k) litigation, and has been for years. Plaintiffs often allege that plan fiduciaries breached their duties by selecting investment options that underperformed or charged higher fees—or both—as compared to so-called "peer" or "comparable" funds. As evidenced by the lower court's ruling in Intel (which was recently upheld by the Ninth Circuit), courts require plaintiffs to utilize "meaningful benchmarks"—in other words, they have to show that their chosen benchmarks are truly comparable in terms of aims, objectives, risks and rewards. Superficial comparisons will not suffice. The "wheelhouse" of mutual fund litigation typically involves allegations of excessive fees, underperformance, and failure to follow prudent processes. Recent case law, such as Intel, has made it clear that conclusory allegations and inept benchmarking will not likely survive motions to dismiss.

Sharon Remmer: Thanks so much for that additional context, Amy. I think it's worth noting that in Intel, the committee did not have any readily available benchmarks for the target date funds ("TDFs") it put on the Intel plans' menus. Instead, the committee developed its own customized benchmarks in order to evaluate its TDFs. Dan, can you tell us a little more about that process?

Dan Ward: Sure. The committee's customized benchmarks in the Intel case were made up of a "composite of the underlying...benchmarks" for each asset class included in the Intel funds, which it disclosed to plan participants and beneficiaries. According to the committee, the benchmarks had "the same asset allocation as the fund's target asset allocation and use[d] index returns to represent the performance of the asset classes." The fact that the committee undertook this step seemed to carry weight with the court, and it bolstered the committee's argument that it followed a prudent process in accordance with ERISA. I think it is fair to assume that as alternative investing becomes more commonplace among plans in the coming years, we should see improvements in available benchmarking going forward. So long as plan fiduciaries are appropriately utilizing these resources, they are diligently maintaining comprehensive documentation of their decision-making and the rationales for choosing particular investment options, and they are adhering to a robust process, that should go a long way in the event of a lawsuit down the road.

Sharon Remmer: I want to circle back to something I mentioned at the beginning, about how the Order directs the Department of Labor and other agencies to issue new guidance and/or safe harbors to help expand access to alternative investments. However, we should also mention that tools and structures already exist that would allow alternative investments to play a role on 401(k) plan menus. For example, even today, we can design asset allocation funds (like TDFs) that can accommodate the unique liquidity and valuation needs of 401(k) plans. This means that fiduciaries, and especially asset managers, may want to start thinking about laying the groundwork now, in case they want to offer alternative assets in the future.

For example, to help mitigate the risks that Dan and Amy touched on, plan sponsors and fiduciaries can take certain steps when it comes to evaluating and selecting investments that provide exposure to alternative assets:

1. Conduct Thorough Due Diligence: Carefully evaluate the alternative investment, including its structure, fees, risks and historical performance. Document the decision-making process to demonstrate prudence.
2. Ensure Sufficient Participant Disclosures and Education: Plan fiduciaries will want to provide clear, comprehensive information to participants about the nature, risks, fees and liquidity constraints of alternative investments. That way, it could help ensure that participants are making informed decisions, and reduce the risk of claims related to inadequate disclosure.
3. Monitor Investments Regularly: Plan fiduciaries will need to regularly monitor the performance, fees and operational aspects of alternative investments. Be prepared to make changes if an investment no longer meets the plan's objectives or if better options become available.
4. Consider Plan Design: You may want to limit alternative investments to a small portion of the plan's assets or offer them only through asset allocation funds, such as target date funds or collective investment trusts ("CITs").
5. Review Liquidity Provisions: Ensure that the plan can meet participant liquidity needs, even if some assets are illiquid. This may involve maintaining sufficient liquid assets or using investment vehicles that provide periodic liquidity windows.
6. Document All Decisions: It is important to keep detailed records of all decisions related to alternative investments, including the rationale for selecting or retaining them, the advice received, and the steps taken to monitor and manage risks.

By following these practices, plan fiduciaries might better manage the litigation risks associated with alternative assets and private equity in 401(k) plans, while still seeking to enhance returns and diversify plan investments.

With that, I'd like to thank both Amy and Dan for joining me here today. For more information on the topics that we discussed or other topics about 401(k)/403(b) litigation risk mitigation, please reach out to any of us or our other colleagues in our ERISA fiduciary practice. You can also subscribe and listen to other Ropes & Gray podcasts wherever you regularly listen to podcasts, including on Apple and Spotify. Thanks again for listening.

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