Recommend Investments to 401(k) Plans? Big Changes Could Be Coming

Advisors who don’t work with 401(k) plans might assume the rules applying to investment selection provide long-settled, clear-cut and easy-to-apply guidance. 

They would be wrong, according to Bonnie Treichel, founder of Endeavor Retirement and partner at Endeavor Law, despite the fact that 401(k)s have existed since the early 1980s and currently hold some $10 trillion in assets. The reality is that retirement plan regulations are in constant flux, and Treichel is tracking at least three major issues that could significantly affect advisors and plan sponsors in the coming months, including a major Supreme Court case and two potential rule changes from the Department of Labor. Add to that a new wave of litigation challenging financial advisors’ and asset managers’ use of plan participant data to “cross-sell” wealth management services outside the 401(k) and the picture gets even more complicated. 

Consulting on 401(k) plan investments is still a great business for advisors, Treichel emphasized, but it requires a willingness to master an ever-changing set of rules and regulations in order to avoid bad outcomes. 

Court Cases and Regulations 

The US Supreme Court recently agreed to review a case, Anderson v. Intel Corporation Investment Policy Committee, that arose after employees sued Intel for using a default investment option that included private assets as a means of hedging against excessive losses in the plan. The fund in question has lagged behind the S&P 500, Treichel noted, but the plan sponsors didn’t select it to maximize performance. Hence, the Supreme Court is being asked to what extent plaintiffs need to provide a “meaningful benchmark” in order for their performance complaint to clear the motion-to-dismiss stage and reach discovery. Oral arguments are slated for October.

“Anderson v. Intel could have a major impact on fund performance litigation,” Treichel said. “I expect the current Supreme Court is likely to side with Intel and raise the bar for litigation to move forward, but nobody has a crystal ball.” 

Separately, the DOL is undergoing two distinct rulemaking processes that could also seriously affect investment selection: 

• The first is a broad proposal that would effectively establish legal immunity for retirement plan fiduciaries if they consider a key set of features when picking investment options and document their decisions. 
• The second, currently under review by the Office of Management and Budget, will apparently address the inclusion of ESG funds in 401(k) plans.  

Data Security. Even if plan fiduciaries get some relief from performance and process-based lawsuits in the near future, another type of case has already emerged in force. “Participants have filed a wave of lawsuits alleging that service providers inappropriately used their data for targeted marketing and cross-selling,” Treichel said. “It’s an important issue for advisors to be aware of as they’re working across retirement plans and wealth management. Transparency and data protection are key.”