A trio of Republican legislators have introduced a bill that would widen the acceptable investment classes in defined contribution plans to, well, pretty much anything—including “digital assets.”
The Retirement Savings Modernization Act was just introduced by U.S. Sens. Pat Toomey (R-PA) and Tim Scott (R-SC) and U.S. Rep. Peter Meijer (MI-03) “to bolster Americans’ retirement savings by allowing workers to diversify assets included in defined contribution plans, such as 401(k) plans.” The authors say that this legislation will amend the Employee Retirement Income Security Act of 1974 (ERISA) “to clarify that private sector retirement plan sponsors may offer plans, including both pensions and 401(k)s, that are prudently diversified across the full range of asset classes.”
Levelling the Playing Field
Positioned as a levelling of the investment playing field between investments by traditional pension plans and participant-directed investments found in 401(k)s, according to a press release the bill’s sponsors say the Retirement Savings Modernization Act will:
1. Clarify that plan fiduciaries may select investment options that include a range of asset classes, including private equity. The bill’s sponsors claim that ERISA itself doesn’t limit the asset classes that may be included—and say that this “amendment makes clear that Congress intends to let investment professionals determine the appropriate range of asset classes.”
2. Protect ERISA’s fiduciary standard, since fiduciaries must still select investments through a prudent process—they take pains to note that the bill explicitly does not create a safe harbor from a fiduciary’s legal duties.
3. Promote the prudent diversification of retirement savings plans. The sponsors point out that the legislation doesn’t REQUIRE access to specific asset classes, but does “provide fiduciaries with the tools to better ensure diversification.”
‘Covered’ Investments?
The short (three-page, widely spaced) bill purports to do all that by actually CREATING the term "covered investment" and adding it to ERISA 404(a)(noting that a fiduciary is not in breach solely for recommending, selecting, or monitoring a covered investment)—saying that it means any direct or indirect investment; and ‘‘(II) includes, but is not limited to, any of the following:
(aa) Commodities.
(bb) Debt, including public and private credit.
(cc) Digital assets.
(dd) Hedge funds.
(ee) Infrastructure.
(ff) Insured products and annuities.
(gg) Private equity.
(hh) Real assets.
(ii) Real estate or real estate-related securities.
(jj) Securities that are listed on a national securities exchange.
(kk) Venture capital.
(ll) An investment in any fund, commingled account, or pooled investment vehicle that invests in any investment, including but not limited to an investment described in items (aa) through (kk).
Why Now?
The timing (and perceived need for) the bill is likely a consequence of cautionary comments made by the Labor Department with regard to particular investment classes, including its stance on defined contribution investments in cryptocurrency (a.k.a. "digital assets") in Compliance Assistance Release No. 2022-01 and on private equity investments in a 2020 Information Letter and 2021 Supplemental Statement. In both cases, while not directly prohibitive of such investments, DOL reminded plan fiduciaries of their obligations of due diligence and prudent process alongside expressing concerns and cautioning plan fiduciaries about the prudence of such investments in view of the evolving considerations.
The bill’s sponsors claim to have “broad industry support, including from the Securities Industry and Financial Markets Association (SIFMA), the Defined Contribution Alternatives Association (DCALTA), the Institute for Portfolio Alternatives (IPA), the Small Business Investor Alliance (SBIA), the American Securities Association (ASA), and the Chartered Financial Analyst (CFA) Institute.”
It does not yet, however, have the backing of the American Retirement Association. “The American Retirement Association opposes any legislation that undermines ERISA’s fiduciary protections for plans and participants,” commented Brian Graff, CEO of the American Retirement Association, and Executive Director of the National Association of Plan Advisors. “We are concerned based on the current legislative language in this bill that it would have that effect, and we will be discussing those concerns with the bill’s sponsors.”
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