Employees can invest alternative assets into their 401(k)s. Here's what to know

• Key Insight: Discover how DOL's safe-harbor proposal opens 401(k)s to private alternatives.  
• What's at Stake: Fiduciary liability and participant outcomes hinge on due diligence and documentation.    
• Forward Look: Prepare for finalized guidance shifting 401(k) investment menus and fiduciary practices.
  Source: Bullets generated by AI with editorial review

Employees can now invest in more than just traditional mutual funds through their retirement plans, and federal regulators are making sure that plan sponsors responsible for choosing additional alternatives are protected.

In March, the U.S. Department of Labor proposed a new safe harbor rule in response to  Executive Order 14330, which President Trump signed last August. The order encourages fiduciaries and employers to expand the use of "alternative funds" — such as private equity, real estate and digital assets like cryptocurrencies — in 401(k) plans. The proposal is intended to protect benefits leaders and plan committees from legal risk as they navigate these changes.

"Historically, the emphasis has always been focused on mutual funds and traditional investments," says Rachel Faye Smith, co-chair of law firm Morrison Foerster's Executive Compensation and Benefits practice. "But during the Biden administration, it was suggested by [governing agencies] that investments in alternative assets were not prudent selections for employees due to existing concerns."  

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Despite their novelty, alternative investment practices will be held to the same standards as traditional funds, meaning that under the Employee Retirement Income Security Act, fiduciaries will need to choose those funds carefully and prudently, keep fees reasonable, follow the plan's rules, and diversify investments to reduce the risk of large losses. If approved, the proposal would create a safety net around the decision-making process: If leaders follow and document the process that led to choosing an alternative investment, they're presumed to have acted in participants' best interests. 

However, that also means they'll need a strong understanding of how these investments work and be ready to stand behind the results.

"Of course employees get significant disclosures about how their funds are set up, but for the average person those are very difficult to read," Smith says. "I find them difficult to read and I do this for a living.  Alternative contributions only add more complexity." 

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High risk, high reward

Alternative investments can generate significantly higher returns than traditional options like target-date or mutual funds — especially if a plan selects a strong-performing fund. Because of that potential capital, there has been a concerted lobbying push from the alternatives industry to gain access to retirement plans. However, there's a reason they've been largely left out of the conversation for the last few years, Smith says. 

"They're riskier," she says. "These are private funds that get their investments directly from investors on the private market and aren't subject to the same level of regulatory scrutiny from the SEC that public funds receive."

Keeping employees' investments safe

Smith suggests benefit leaders start the process by meeting with a company's retirement plan investment advisor or manager to discuss their approach to alternative investments. Additionally, this could also be an ideal moment to review the committee's fiduciary practices, Smith says, and ensure strong recordkeeping, detailed meeting minutes and clear documentation of discussions and decisions. Consider arranging updated fiduciary training so all committee members understand their responsibilities.

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"A lot of companies are a bit lax in their housekeeping strategies that are meant to ensure that leaders understand what they're doing," Smith says. "This is an opportunity to sit down and make sure that everybody [is on the same page] and then take it from there."

While it is yet to be seen whether this change to retirement planning will be beneficial for both employees and benefit leaders, Smith remains hopeful that it's a step in the right direction. 

"We want our employees to be saving for retirement and taking on an appropriate level of risk in a way that will enable them to have a financially secure retirement," Smith says. "I'm cautiously optimistic about the way the industry is going to reconcile this new opportunity with the regulatory requirements."