An outdated exemption is holding back retirement investment options

The Department of Labor (DOL) has recently proposed measures to allow employers to offer more investment options, including alternative investments, in 401(k) plans. Modernizing Prohibited Transaction Exemption (PTE) 77-4 would complement that effort by giving plan fiduciaries more flexibility to build diversified portfolios using today's investment vehicles while preserving important safeguards for retirement savers.

PTE 77-4 allows retirement plan assets to be invested in mutual funds and ETFs managed by the same firm or an affiliate when specific conflict-of-interest protections are met.

Those protections should remain, but the existing exemption should be modernized to include the full range of investment vehicles available to retirement plan fiduciaries in the marketplace.

An outdated rule limits modern investment products

The Employee Retirement Income Security Act of 1974, known as ERISA, generally restricts investment managers serving as plan fiduciaries from steering retirement plan assets into funds managed by the same firm or an affiliate. These restrictions help protect retirement savers from self-dealing and other conflicts of interest.

The exemption allows a manager to allocate the plan's assets into its own or its affiliate's funds only when key safeguards are in place: the manager cannot collect duplicative fees, the plan receives required disclosures, and an independent plan fiduciary approves the investment. These protections have worked for nearly five decades, and MFA supports preserving them.

The challenge is that retirement plans, and asset managers now use a much broader range of pooled investment vehicles than the rule accommodates. Collective investment trusts, closed-end funds, private funds, and other non-registered funds can all play a role in diversified retirement products. These vehicles can help provide exposure to, private credit, private equity, hedging strategies, and other alternative investments, but the current exemption is outdated by remaining tied to only mutual funds and exchange-traded funds.

Modernization would support more efficient diversification

DOL can modernize the exemption by extending it to additional pooled investment vehicles while retaining the safeguards that protect retirement savers.

This change would not require employers to include alternative investments in their plans. It would, instead, give plan fiduciaries greater flexibility to select professionally managed products they determine are appropriate for their participants.

Modernization would make it easier for managers to incorporate alternative investments and related strategies into diversified asset-allocation products offered to 401(k) plans.

An updated exemption should preserve the core protections that have long applied:

• Prohibit duplicative management fees.
• Require clear disclosure of the investment and potential conflicts.
• Require approval by an independent plan fiduciary.
• Preserve plan fiduciaries' duty to act solely in the interests of plan participants.

DOL's recent 401(k) rule proposal would create a clearer process for plan fiduciaries to evaluate a wide range of asset classes and investment strategies. Updating PTE 77-4 would help put that principle into practice by preserving strong safeguards, reducing unnecessary barriers, and giving fiduciaries greater flexibility to build diversified portfolios for American workers.

Read more: Research note: Adding alternative assets materially improves portfolio performance - Managed Funds Association

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