President Donald Trump’s August 7 executive order signals a national commitment to fostering innovation within 401(k) plan investment options. For the in-house fiduciary members of the Committee on Investment of Employee Benefit Assets who serve as stewards for their colleagues’ retirement futures, this message resonates deeply.
CIEBA investment fiduciaries are highly sophisticated professionals, dedicated to rigorous due diligence and thoughtful oversight, always with the best interests of plan participants at the forefront of their thought process. They recognize that their role is not simply administrative, but truly fiduciary—charged with safeguarding assets and enabling sustainable, optimal growth for every employee.
Alternative Investments in DC Plans: A Missed Conversation?
CIEBA members serve as investment fiduciaries for many of the nation’s largest private sector defined benefit and defined contribution plans, and they have significant experience with alternative investments. On average, 23.6% of CIEBA member DB plan assets were allocated to alternatives—such as real estate, hedge funds, private equity and private credit—over each of the past five years, based on CIEBA’s latest, proprietary Annual Membership Profile Survey.
Within the walls of defined contribution plan investment committee meetings, the relative merits and drawbacks of including alternative investments should also be robustly discussed. These asset classes offer diversification, potential for enhanced returns and can play a vital role in modern portfolio construction. Sophisticated fiduciaries are eager to weigh their benefits and risks with intellectual rigor and professional care. Yet a persistent and formidable obstacle stands in the way: the current litigation environment.
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The Chilling Effect of Litigation Risk
Rather than enabling open, well-informed debate, litigation risk has a chilling effect on investment committees. Frequently, lawsuits are launched on frivolous grounds, with thin allegations that rarely withstand scrutiny but nevertheless impose heavy burdens on companies that voluntarily offer highly valued 401(k) plans to their employees. While prudent fiduciaries are fully prepared to defend their thorough processes and demonstrate their commitment to acting in the best interests of participants, the potential cost, disruption and reputational risk associated with litigation presents a huge headwind—even for those who are most diligent.
The looming threat of costly, prolonged legal challenges discourages companies from exploring innovative solutions—even those that might objectively serve participants’ best interests. The primary concern is not an absence of fiduciary expertise, dedication or substantial regulatory ambiguity; rather, it is a litigation environment that inhibits constructive and meaningful dialogue.
Why the Executive Order Matters
Trump’s executive order calls on agencies to clarify guidance and facilitate innovation and, importantly, to relieve the litigation risk currently faced by prudent fiduciaries. That is important because for real progress to occur, the litigation climate must be addressed. Today’s environment pushes companies to prioritize cost reduction and risk avoidance ahead of effective diversification and participant outcomes, largely out of fear of lawsuits that merely allege that less expensive options were available elsewhere. This ultimately disadvantages both fiduciaries and the employees whose retirements they safeguard.
Prudent Stewardship Deserves a Safer Forum
If litigation reform can be achieved, investment committees will be empowered to fully exercise their expertise. They could engage in thorough, open discussions about alternatives, supported by:
- Transparent risk and return profiles;
- Clear liquidity and fee structures;
- Historical performance data; and
- Robust manager due diligence.
Such an environment would allow stewards to act decisively and thoughtfully, confident that their prudent processes will be judged fairly—free from undue legal jeopardy.
Looking Ahead
In-house investment fiduciaries are always prepared and willing to drive innovation, provided the litigation climate allows for meaningful, participant-centered debate with their company’s peers and leadership. The Trump administration’s order is a promising signal, but the path forward demands a legal landscape in which prudent stewardship, not fear of frivolous litigation, guides decisionmaking. Only then will investment committees fully realize their potential as guardians of retirement security, for the benefit of every employee they represent.
Dennis Simmons is the executive director of the CIEBA, which is made up of in-house chief investment officer fiduciaries collectively overseeing more than $2 trillion in retirement assets on behalf of more than 17 million participants and beneficiaries nationwide. More information on the organization can be found at www.CIEBA.org
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of CIO, ISS Stoxx or its affiliates.
Tags: Alternative Investments, Committee on Investment of Employee Benefit Assets, Defined Contribution, Private Markets
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