Many commentators are suggesting that the recent executive order and the directive for regulatory action towards adding private equity and other alternative assets to 401(k) plans does not mean that those assets are destined to end up in 401(k) plans. But personally, I think that belief is almost certainly naïve – particularly with regard to private equity investments, which already have a head start in the financial industry’s land rush towards 401(k) assets. As a result, plan sponsors and fiduciaries need to start thinking about how they are going to process the push to add private equity investments to plans in a way that protects them from potential litigation and fiduciary liability.

And the answer is that we are headed back to the future. It wasn’t that long ago – maybe ten or fifteen years ago – that lawyers for plan sponsors emphasized process and laying out a factual record of reasonable conduct as the best preventative to the risk of being sued for breach of fiduciary duty. My slide decks from presentations on fiduciary duty under ERISA from the mid-2010s, for instance, always had a slide in them to the effect that, as they say in football, the best offense was a good defense – in other words, that plan fiduciaries’ best defense against future breach of fiduciary duty lawsuits would be to document a course of reasonable fact finding and decision making, which could be used in the future to prove prudent behavior by the fiduciaries.

Over time, though, this fact based approach to protecting against fiduciary liability, to planning for the risks posed by fiduciary decisions and to defending against breach of fiduciary duty claims fell out of favor, in deference to legal strategies intended to resolve breach of fiduciary duty cases without ever getting to a factual testing of the prudence of the decision making at issue. The current focus on disputing standing at the motion to dismiss stage, for instance, is but the latest in a long line of legal defenses posed in breach of fiduciary duty litigation with the hope, for the defendant and its counsel at least, of never getting to a point where the merit of the fiduciary’s decision itself is tested.

There have been good reasons for this. For starters, merit based defenses concerning the fiduciary’s process of decision making can typically only be addressed in the first instance at summary judgment and at the second instance, at trial. By then, discovery and motion practice costs – not to mention trial preparation, expert and trial costs – will have been substantial, making it completely rational for a defendant (or its insurer) to favor legal arguments that can end a case earlier over fact based defenses that cannot be ruled upon until much later in a case. Moreover, the potential judgment against a fiduciary, if at summary judgment or trial the court rejects the fact based defense, can be so great that instead pursuing legal arguments only, followed by settlement if necessary, can be the rational approach for this reason as well.

Lately, though, we have seen more and more instances of merit based arguments, rather than legal arguments, carrying the day, including after trial (which tends to be the ultimate test of whether a defendant and its counsel were right to select a fact based defense premised on the prudence of the fiduciary’s decision making over early legal arguments followed by settlement if needed). Fiduciaries who have to make decisions about whether to allow, and if so in what guise, private equity investments into 401(k) plans would be wise to take note of the trend and to make their decisions regarding private equity assets in plans accordingly. This means that they should approach the issue in ways that will allow them to defend against future class action lawsuits by demonstrating a prudent course of decision making in this regard even where the financial outcome to participants from having added the asset class in a particular plan is poor.

There are ways to do this, and ways to document it for purposes of potential future litigation. Plan fiduciaries should be aware of this and act upon it, as the rush towards adding alternative assets to plans picks up steam. Doing so will lead to two long term effects that will favor them. First, it will make them less likely to be sued when the class action bar turns its attention, as it will, to breach of fiduciary duty suits built on the inclusion of private equity investments in plans. As time goes on, fiduciaries who follow this approach today will win more of these types of cases in the future than those who didn’t, and, as inevitably as night follows day, other fiduciaries who follow this approach will then find that, as a result, they are less likely to be sued than are fiduciaries who did not do so. After all, class action lawyers are looking to cull the herd, not looking to tangle with the best defended animals in the fiduciary forest.

Second, if they are sued, it will make them more likely to win. How do we know this? We see it already in the Ninth Circuit’s recent decision in Intel, in which the court upheld the dismissal of breach of fiduciary duty claims based on the inclusion of private equity and other alternative investment options in a 401(k) plan. The Court essentially ruled that using such assets was not per se a breach of fiduciary duty, but that instead, if used thoughtfully and prudently, it could be consistent with fiduciary obligations. What this teaches us going forward is that, if a fiduciary contemporaneously documents a proper factual basis for including private equity assets in a plan, then that fiduciary can sleep at night, safe in the knowledge that he or she probably did not commit a fiduciary breach in adding that asset class to the plan.

In a subsequent post, as part of my Plan Sponsor and Fiduciary 2.0 series, I will provide a cheat sheet (or cheat code or life hack, or whatever is the preferred current cliché), for how to create – and document- exactly that course of decision making, so as to support this type of a defense in the future.

For now, though, paying close attention to the commentary and discussions about the Intel decision is worthwhile. I am partial to this detailed discussion of the case on the Fid Guru blog. You can find the decision itself here, as well.