Initial Fiduciary Considerations for Offering Alternative Investments

By: Anya Freedman, BLB&G
 

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In May, the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal of Anderson v. Intel Corporation Investment Policy Committee (“Intel”)—a long-running challenge to Intel's use of hedge funds and private equity within plan options.¹ The lawsuit alleged that the inclusion of alternative investments in the company's two defined contribution plans was a breach of their fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”). The court held that the duty of prudence under ERISA is about process, not outcomes, and that simply alleging that alternatives underperformed public markets and required higher fees is not enough to claim a breach of fiduciary duty.² 
 

In August, President Trump signed an Executive Order directing federal agencies—principally the U.S. Department of Labor (“DOL”)—to “democratize” access to alternative assets in participant directed defined contribution plans.³ The Executive Order signals a policy push to make it easier for plan sponsors to include private equity, private credit, private real estate, and even digital assets in plan menus. Within days, the DOL rescinded a 2021 “supplemental statement” that had cautioned fiduciaries against offering private equity in most 401(k) plans, framing that guidance as having a “chilling effect.”⁴   
 

Together, the Intel decision, the Executive Order, and changing regulatory guidance in response to the Executive Order, will shape how trustees approach alternatives in participant directed plans. This article outlines key initial considerations for fiduciaries.
 

The Executive Order directs federal agencies to remove impediments and facilitate access to alternatives in deferred compensation plans—pointing to private equity, private credit, real estate, infrastructure, and digital assets. It does not itself amend ERISA (which is a statute enacted by Congress and would require amending legislation), but it signals rulemaking and guidance to ease adoption of alternatives. Even for governmental deferred compensation plans that are not governed directly by ERISA, DOL regulatory actions, and court decisions, applying ERISA can provide helpful guidance for fiduciaries.
 

The Executive Order does not override ERISA's fiduciary duties, eliminate litigation risk, or permit “stand alone” participant investments directly into private funds without intermediary structures and safeguards. It also does not bless crypto, private equity, or any other alternative as prudent per se (industry groups had been pushing for a safe harbor of this kind). ERISA's prudence, diversification, and exclusive benefit duties still govern every selection and monitoring decision.
 

In response to the Executive Order, the DOL, which administers ERISA, took the immediate step to rescind the agency's December 2021 cautionary statement and to reaffirm its 2020 DOL Information Letter.⁵  
 

The DOL 2021 Supplemental Statement was a Biden administration letter that had previously warned ERISA plans that most fiduciaries were “not likely suited” to evaluate private market funds in deferred compensation menus.⁶ The rescission of this statement removes a strong discouraging signal but does not lessen fiduciary standards.
 

That means that the 2020 DOL Information Letter, adopted under President Trump's first term, is again the operative guidance. The 2020 letter said that ERISA plans may offer a professionally managed, multi asset class vehicle (e.g., custom target date, target risk, or balanced fund) that has a private equity component, provided the fiduciary process is robust and participants do not directly select a private fund on a stand alone basis.⁷
 

The bottom line is that the federal policy winds favor alternatives—if implemented prudently.
 

The Ninth Circuit's Intel Decision
 

Plaintiffs were plan participants who argued Intel's fiduciaries acted imprudently by allocating to hedge funds and private equity in certain plan options and by not adjusting when those strategies allegedly underperformed traditional index heavy portfolios.⁸
 

The Ninth Circuit agreed with the district court: the complaint did not plausibly allege imprudence. ERISA evaluates fiduciaries based on their methods and process at the time their decisions are made, including documented diligence, expert input, and ongoing monitoring protocols.⁹ This is the focus of judicial analysis, rather than on hindsight comparisons to an all public markets alternative. That is powerful precedent for sponsors considering diversified options that include private market components.
 

Intel is not a blanket permission slip or safe harbor from litigation risk. It does not immunize sponsors from claims about fees, liquidity, valuation, or disclosure. Rather, it underscores that well documented prudence can prevail against lengthy, hard-fought litigation—even when strategies are complex, less liquid, and contain additional risks and higher fees than traditional public market structures.
 

Practical Guidance for Fiduciaries Considering Alternatives
 

1) Evaluate objectives for your plan and document the “why” in your policy.
 

Be precise and intentional about the problem you are solving by considering alternatives. Compared to traditional public market investments already widely available in participant-directed retirement plans, alternative investments like private equity tend to involve more complex organizational structures and investment strategies, longer investment durations, and more complex (and generally higher) fees. Alternative investments are also subject to different regulatory requirements than public market investments. In addition, valuation of alternative investments can be more complex because investments like private equity often have no clear, objective, and transparent market value. There is often an element of subjectivity involved in valuing each of the portfolio companies within a fund prior to a liquidity event such as the companies' sale or an initial public offering.
 

Before deciding whether to offer an alternative investment such as a multi-asset vehicle with a private equity component, plan fiduciaries should evaluate what objectives they are seeking to achieve, such as (i) broader diversification, (ii) hedged investment risk that does not track the broader public markets, (iii) access to investments with longer time horizons, or some other objective. This evaluation should tie each objective to the plan's features and the needs of plan participants (e.g. participant ages, normal retirement age, anticipated employee turnover, and contribution and withdrawal patterns). Document this “why” in your board and/or committee minutes and Investment Policy Statement (“IPS”). Intel teaches that judges examine your decision-making methods—show your homework.
 

2) Choose the structure wisely.
 

For most plans, the 2020 DOL Information Letter points to considering indirect exposure to alternatives through professionally managed, multi asset vehicles, including daily priced vehicles designed for deferred compensation plans. The letter does not appear to contemplate stand alone private fund options, which would create significant disclosure, valuation, liquidity, and operational challenges. To that end, the 2020 DOL Information Letter suggests that the fiduciary consider whether the prospective alternative investment fund is structured in a way to address the unique needs of participants in an individual retirement account plan. Specifically, with regard to valuation and liquidity: “a plan fiduciary, for example, could require that the private equity investments in the investment alternative not be higher than a specific percentage, ensure that the private equity investments be independently valued according to agreed-upon valuation procedures …and require additional disclosures needed to meet the plan's ERISA obligations to report information about the current value of the plan's investments.”¹⁰ 
 

3) Ensure strong governance and specialized professional expertise.

Map responsibilities across the board, investment committee, staff, outside investment consultant or outside chief investment officer, and recordkeeper. Ensure the team (or retained advisors) has expertise in private markets, valuation, cash flow modeling, and manager due diligence. If you lack internal expertise, consider creating and hiring a new position or contracting with an outside fiduciary expect, and document the rationale each step of the way. The DOL historically emphasizes matching the complexity of the product with the fiduciary's capability; the rescission of the 2021 guidance does not remove that overarching fiduciary expectation. Indeed, the 2020 Information Letter stresses this point: “the plan fiduciary must consider whether it has the skills, knowledge, and experience to make the required determinations or whether the plan fiduciary needs to seek assistance from a qualified investment adviser or other investment professional.”¹¹
 

4) Negotiate fees and demand transparency.
 

High fees and layered costs drive lawsuits. Demand fee transparency. Benchmark against credible deferred compensation market comparable investments, negotiate fee discounts, and avoid performance fees misaligned with participant horizons. Record your fee analyses and side by side public market alternatives. Intel underscores that results are not the test, and the fact that alternatives include higher fee structures than public market alternatives is not a per se breach of duty.¹² But the Intel case made clear that in a future case, poor fee process can constitute a breach of the fiduciary duty of prudence and lead to liability.
 

5)  Communicate clearly with participants.
 

Complexity is not a fiduciary breach—but confusion can be. Draft plain English disclosures: what the strategy does, key risks (illiquidity, J curve, valuation uncertainty), expected holding periods, and how it fits alongside public market index funds. Build extensive participant education into the rollout of new alternative investment options for participants (webinars, Q&A, factsheets), and coordinate with your recordkeeper to present alternatives coherently within online tools (e.g., showing risk/return ranges). The Executive Order may encourage more complex offerings, but nothing in it reduces your underlying fiduciary communications duties.
 

6) Define and monitor what “good” alternative investments look like.
 

Set monitoring metrics beyond long-term performance: capital call/distribution pacing vs. plan cash flows; valuation timeliness; secondary liquidity utilization; participant complaints; and operational incidents. Regarding valuations, the 2020 DOL Information letter suggests that plan fiduciaries consider requiring “that alternative investments with a private equity component be independently valued according to agreed-upon valuation procedures.”¹³ Calendar formal alternatives reviews at least annually, with internal and external experts present and materials in the packet for advance review by board and/or committee members. With the assistance of general counsel, memorialize decisions and rationales in formal minutes. Courts (like the Ninth Circuit in Intel) look for a regular, informed process that is more similar to what is expected for the oversight of defined benefit plan investment portfolios.
 

7) Prepare defensively for litigation through robust documentation.
 

Assume that in five years, your actions will be judged by a court reviewing a PDF of your board minutes and other documents demonstrating your decision-making process and ongoing fiduciary oversight mechanisms. Keep a litigation file: IPS versions, manager memos, fee studies, expert reports, training logs, participant communication drafts, and board education agendas. The Ninth Circuit's decision in Intel indicates that a well papered process—not perfect investment results—wins cases.¹⁴ Moreover, fiduciary decisions must be prudent at the outset and periodically reviewed over time. Fiduciaries who decide to offer alternative investments should also place formal monitoring structures in place to ensure that these decisions are reviewed at defined intervals and continue to serve the best interests of plan participants over time.
 

Conclusion
 

The Executive Order and the DOL's rescission of the 2021 letter remove some previous policy headwinds and invite additional diversification in deferred compensation plans. The Ninth Circuit's Intel decision confirms that ERISA permits fiduciaries to increase complexity for participants' menu of investment options, if thoughtfully and prudently constructed. None of that lowers the bar for trustees or eliminates the risk of litigation and potential liability for breach of fiduciary duties owed to plan participants. But together, these executive, regulatory, and judicial developments help to clarify the test for fiduciaries considering including alternatives in their plan options: documented prudence aligned to policy goals and ongoing monitoring of outcomes for participants. Fiduciaries who meet that standard—and who determine that additional diversification through the inclusion of alternatives to traditional public market investments would best serve the interests of their plan participants—may expand diversification carefully, in a manner that aligns with the direction of federal policy and honors the enduring, process focused prudence standard affirmed most recently in Intel. 

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