Fred Reish has an excellent article out on the technical and substantive aspects of the executive – and soon to be regulatory – efforts to open 401(k) plans to alternative investments, with a particular focus on the targeting (pun intended) of target date funds as the channel for bringing them into the investment holdings of millions of American workers. I have written extensively about various concerns I have about doing so, including with regard to burying them within the range of assets held within a target date fund. I am skeptical, as I have written elsewhere, that this is in the best interest of plan participants; that all plan participants will even know they are holding such assets in their accounts; or that it won’t put plan sponsors and fiduciaries at significant liability risk. I am also skeptical, however, as I have also written elsewhere, that alternative investments won’t end up in target date funds, despite these issues.

One of the central substantive issues with adding alternative investments into 401(k) plans concerns the disjunct between sloganeering and the substantive purpose of 401(k) plans. Plans, and the accompanying costs to the taxpayer from deferral of taxes, do not exist – and ERISA was not enacted – to democratize investing, which seems to be the alleged rationale for the idea of opening plans to such investments. In the article, Fred goes to the question at the heart of whether the regulatory and financial industry push to add such investments to plans aligns with the purpose of such plans and the real justification for the cost to the Treasury of them – which is the goal of protecting and improving retirement outcomes for workers. Fred points out that the real question in the long run for fiduciaries, in deciding whether to grant entrance to plans to such assets, is whether doing so improves, or instead harms, the retirement readiness and outcomes for plan participants. He also points out that it involves far more than just consideration of the returns on the investment, but also numerous issues related to the propriety of the investment for the employee pool. All of this will go into any analysis of the question of whether it was a fiduciary breach for plan sponsors to allow, rather than seek to preclude, their addition into target date funds used in a given plan.

To me, there is one central and absolute starting point – where is the evidence, and what is the data, showing the potential improvement to investment outcomes, and at the cost of what extent of additional volatility, for plan participants? Without that, plan sponsors are just guessing and fiduciaries will never, if and when sued, be able to show that they fully investigated and properly understood the investment option when they approved it for plan participants. Even if and when that data is made available to plan sponsors and fiduciaries, as I have written elsewhere, most are not going to have the sophistication themselves or, within their companies, the internal expertise to interpret the data and information. As a result, plan sponsors are going to have to bring in outside experts with the ability to actually pierce any fog, deliberate or otherwise, created by the data and to project out the likely financial and risk ramifications of the change to the asset mix and the investments.

Anything less will make it impossible for plan fiduciaries to defend, other than on legal and technical grounds rather than on the merits of the decisions, future breach of fiduciary duty claims alleging losses to plan participants from the addition of alternative assets into plans, whether through inclusion in target date funds or otherwise.