Busting 5 Myths About Private Market Investments

Jason Levy

Lisa Gomez

Helping Americans achieve a financially secure retirement is not a uniquely Democratic or Republican goal—it’s a shared goal of thoughtful policymakers, regardless of political party. Yet as our country has become increasingly polarized, retirement policy has too often become collateral damage, with headlines and talking points crowding out legal requirements and sound fiduciary judgment.

That noise ultimately hurts the very people the Employee Retirement Income Security Act of 1974 was designed to protect—retirement savers. It also complicates decisionmaking for plan fiduciaries and advisers who are interested in responsibly considering innovative products and services that could benefit participants, but who must operate against a backdrop of shifting political narratives.

Investment decisions, by their nature, play out over extended time horizons and often outlast the administrations that influence retirement policy debates, making stability in the underlying governing legal framework essential. While retirement policy debates often track broader political divisions, the question that ultimately matters to workers is far simpler: whether decisions made on their behalf will support long-term financial security.

As a prime example, false narratives abound about environmental, social and governance considerations in retirement plan investing. It became media gospel that the Department of Labor prohibited ESG investing during the first administration of President Donald Trump and required it during the administration of former President Joe Biden.

In reality, neither was true. The final ESG rules established by both administrations tracked ERISA’s core fiduciary principle: The duties of prudence and loyalty require plan fiduciaries to focus on relevant risk-return factors in making investment decisions, and they may not sacrifice investment returns or take on additional investment risk in favor of unrelated objectives. ESG factors could be considered—when relevant—for that purpose. The ESG debate demonstrates how easily ERISA’s stable fiduciary framework can be obscured by political narratives that have little to do with the statute itself.

With the current administration’s executive order on “democratizing access to alternative assets for 401(k) investors” and related agency action, we are concerned that debate about investments with private market exposure in defined contribution plans will focus more on political narratives than on the specific legal standards and investment considerations required by ERISA. Retirement plan fiduciaries may reach different conclusions about whether such investments should be included in their plan lineups, but consideration of such investments and related policy debate should be rooted in the law and not in the five myths that we break down in this article.

Myth No. 1: An Executive Order Can Change ERISA’s Fiduciary Investment Standard

The ERISA fiduciary investment standard is not just the law; it is good retirement policy. Maximizing risk-adjusted returns, whether through reduced fees generated from making an investment option available in a more cost-efficient vehicle or through stronger performance potential due to greater diversification, can have significant individual impacts. Even seemingly small improvements compounded over the course of a worker’s career can mean the difference between a financially secure retirement and one strapped for cash.

Just as the DOL ESG investing rules tracked the ERISA fiduciary investment standard, the executive order on alternative assets and related agency action cannot—and will not—alter the standards for selecting and monitoring investment options within a plan lineup. Fiduciaries must act prudently and solely in the interest of plan participants, regardless of whether an investment includes public or private market assets.

Myth No. 2: 401(k) Plans Are Now Required to Offer Private Market Investments

Executive action cannot mandate, compel or newly “open the door” to private market exposure in 401(k) plans. Plan fiduciaries subject to ERISA fiduciary standards that U.S. circuit courts of appeal describe as “the highest known to the law” are responsible for considering whether to include investments with private market exposure in plan lineups. These fiduciaries are required to put their participants’ financial interests first and to select and monitor investment options pursuant to the ERISA fiduciary investment standard.

This means that executive action cannot mandate use of investments with private market exposure in 401(k) plans; nor can it provide access where access was once prohibited. ERISA has never categorically prohibited investments, including those with private market components. If a responsible fiduciary conducts a prudent evaluation process and reasonably determines that an investment with private market components meets the ERISA standard for that plan and its participants, that option may be added to the plan.

Myth No. 3: Participant Demand Determines What Belongs in a 401(k) Lineup

Any ERISA investment decision must be supported by a prudent process that considers all relevant facts and circumstances. Investments with private markets exposure raise unique issues (such as liquidity, transparency and valuation) that should be evaluated as part of the determination that impacts a responsible plan fiduciary’s decision.

What does not align with the investment standard? Basing a decision on whether to include an investment with private market exposure solely on whether plan participants are asking for one. A 401(k) plan lineup is not crafted based on a survey of participant preferences. That is not the law, and it would be deeply problematic retirement policy. If it were, plan lineups would be chock full of the latest fads or based on the political winds of the day, and American financial retirement security would suffer.

ERISA’s fiduciary framework exists precisely because participants rely on fiduciaries to prioritize long-term outcomes over short-term sentiment, whether driven by market trends, headlines or political debate.

Myth No. 4: ERISA Requires Fiduciaries to Select the Lowest-Cost Investment Option

Investments with private market exposure will cost more than investments consisting of components that passively track an index. Many critics of investment in private markets warn of the fees involved. While cost is certainly an important and relevant factor, it should not be considered in isolation.

Under ERISA’s fiduciary investment standard, the question is whether an investment is reasonably determined to provide superior returns, net of fees. There is no debate that a responsible fiduciary may select a higher-cost, actively managed fund if, after a prudent process, the fiduciary determines that the investment meets this standard.

The same analysis applies to an investment that has an actively managed private market component. While it is critical to ensure that the costs associated with private market investments are transparent—as with any investment—those costs should not be the sole basis for a fiduciary’s decisionmaking. Courts have consistently recognized that higher fees are not imprudent in cases when fiduciaries reasonably conclude they are justified by expected net performance or diversification benefits.

Myth No. 5: Political Considerations Should Drive Investment Decisions Involving Private Markets

Like ESG and other hot button retirement policy topics, private market access is generating sensational media attention and needless politicization. Plan fiduciaries and their advisers should resist the politicization and focus on the law.

This requires active engagement: developing the expertise to evaluate the unique characteristics of private market investments; building prudent processes that withstand scrutiny; and making decisions grounded in participant outcomes, rather than being influenced by headlines.

Private market exposure in 401(k) plans is neither mandated nor forbidden. The question is not whether fiduciaries may consider such investments—it is how they do so. ERISA demands a prudent, well-documented process grounded in participant financial interests, not politics. Prudent analyses can—and do—yield different answers. What should not differ is fiduciaries’ commitment to apply ERISA’s standards without regard to shifting political narratives.

American workers saving for retirement certainly hold a wide range of political views, but they have a common expectation: that fiduciaries exercise independent, law-driven judgment and remain focused on whether their decisions improve the likelihood of a secure retirement. Fiduciaries who keep that singular focus will best fulfill the letter and the spirit of ERISA and best serve the workers who depend on them.

Lisa M. Gomez is the former assistant secretary of labor for employee benefits security and is the president and founder of LMG Collaborative Consulting Solutions LLC. Jason Levy is a senior counsel at Great Gray Trust Co.