The Department of Labor’s proposed fiduciary rule has been widely reported but not yet well critiqued. A good starting point in this effort can be found in a Wall Street Journal opinion piece written by Lori Chavez-DeRemer before she resigned as head of the agency earlier this month.
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In it, she argues for an agency priority under President Donald Trump: decreasing regulatory burdens and lowering litigation risks for plan fiduciaries recommending alternative investments in 401(k)s. Chavez-DeRemer writes: “Our rule confirms that there is no investment class or strategy that is per se unlawful for retirement plans. That includes alternative investments, such as private equity … which could be used to diversify plan offerings.”
Of course no class of investments is per se unlawful. But this isn’t the question. The question is whether alternatives are, as a rule, too costly, illiquid, opaque, risky and difficult to value to be safely included in workers’ retirement accounts. The answer is yes — and this is the central point that the DOL’s proposed rule fervently avoids by contorting logic, facts and common sense.
Chavez-DeRemer makes other claims in the Journal piece — all of them problematic.
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Procedural vs. substantive prudence
Claim: “The department’s rule reaffirms that the governing statute — the Employee Retirement Income Security Act of 1974, or ERISA — is a law of process.”
That is both right and wrong. Yes, ERISA is about process. But the proposed rule does not adhere to ERISA’s overall mission. Why? Procedural prudence often becomes a checklist. Substantive prudence requires actually evaluating whether the issue meets a fiduciary duty of care. By excluding substantive prudence, the rule flouts the fiduciary prudent process.
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Investment innovation
Claim: “The proposed rule makes clear that investment innovation is a virtue, not a vice, under fiduciary law.”
That is correct and also irrelevant. While innovation is an important consideration when making recommendations on investments for inclusion in 401(k)s, it has nothing to do with plan sponsors’ fiduciary duties.
Diversified investments
Claim: “We recognize the benefits of including diversified investments ….”
What’s next — the DOL endorsing grandmothers and apple pie? Diversification is core to fiduciary recommendations. But it is unrelated to whether an investment may be inappropriate for retirement savers.
Investment neutrality
Claim: “The Trump administration is restoring the neutrality toward various investment types that predominated for almost 50 years of retirement law and regulation before the Biden administration’s radical departure.”
That is wrong. In applying due care and prudence, a fiduciary is not supposed to be neutral. In evaluating product features, a fiduciary acts for the plan participant.
Political agendas
Claims: “The duty to invest for the sole financial benefit of plan participants doesn’t allow fiduciaries to pursue political agendas or engage in self-dealing.” … “The department isn’t promoting any particular investment option. We aren’t picking winners and losers.” … “We are applying the principle-based rules that the law requires.” … “The hallmark of our law is fiduciary judgment.”
Wrong, wrong, wrong and wrong again. Each claim reveals a misunderstanding of fiduciary duties. Each defies logic, facts and/or common sense as to what constitutes a prudent recommendation. For example, is it a “political agenda” to apply substantive prudence to ask whether alts are too costly, illiquid, opaque and risky? The proposed rule suggests that it is. This is inexplicable.
Taken together, these claims reflect a proposed rule untethered to ERISA law and the DOL’s regulatory efforts under the Obama and Biden administrations to strengthen fiduciary duties.
They reveal that Trump’s DOL, now under the acting leadership of Keith Sonderling, has abandoned any plausible concept of the core ERISA fiduciary concepts of loyalty, care and prudence — and of the simple truth.
