Lawmakers and regulators must reform the “significant litigious environment” and make it more difficult for investors (and their attorneys) to sue ERISA fiduciaries who decide to offer alternative investments in 401(k) plans, according to one SEC commissioner.
During a speech at the Investment Company Institute’s Retail Alternatives and Closed-End Funds Conference in New York, Commissioner (and former Acting Chair) Mark Uyeda said litigation reform concerning 401(k) exposure to the private markets is “not about shielding bad actors,” but ensuring responsible fiduciaries aren’t punished for good-faith decisions.
“ERISA does not require perfection. It requires prudence,” Uyeda said. “Without such reform, the threat of opportunistic lawsuits will continue to chill innovation and discourage fiduciaries from offering more diversified investment options—even when those options are in the best interest of participants.”
In August, President Donald Trump signed an executive order aimed at easing access to alternative assets (including private equity, private credit, real estate, real assets and cryptocurrency) in employees’ defined-contribution plans.
In the order, Trump asked regulators at the SEC and Labor Department to coordinate and revisit current guidance on alts access to retirement plans. In his first term, Trump ordered the Labor Department to clarify that private equity could be included in retirement plan portfolios (the Biden administration later rescinded the guidance).
In his speech to the ICI, Uyeda lauded Trump’s order, but stressed that “access alone” does not suffice. Uyeda advocated for reforming when attorneys can litigate fiduciary decision-making, claiming lawsuits in this area “are often driven by hindsight bias and very permissive pleading standards.”
“It is not enough to allege merely that a plan included private investments; plaintiffs should be required to identify specific recommendations, decisions or processes that allegedly failed to meet ERISA’s standards of prudence and loyalty,” Uyeda said.
Uyeda recommended legislative reform “mirroring the principles” of 1995’s Private Securities Litigation Reform Act, which tightened the requirements for securities-related lawsuits and “recognized the significant negative impact that greedy and corrupt plaintiff’s lawyers” were having on the U.S. economy.
SEC Chair Paul Atkins (who succeeded Uyeda’s interim leadership) has also said retail investors with 401(k)s would benefit from private markets access “within reason,” and expects the commission to hold “on the road” roundtables on the subject.
However, the potential practice has critics worried about broader risks; Andrew Ross Sorkin wrote in The New York Times Magazine last month that expanding private markets’ access to retirement savings would be a “live and extremely high-stakes test of whether the most complex corners of finance can be safely opened to millions of ordinary savers.”
In his speech, Uyeda emphasized that, regardless of the appropriate amount of private market exposure in 401(k) plans, the likely answer was not zero, and that regulators should ensure investors benefit from long-term capital formation and diversification.
“The goal is not to turn every retirement saver into a venture capitalist,” he said.
