More Options, More Risks

Faced with the possibility of including private equity (PE) and other alternative investments along with the menu options more traditionally available to 401k savers, retirement plan sponsors have ever more to weigh as they shoulder their fiduciary responsibilities. Previously, reserved for wealthy investors, private equity investments expand options for retirement plan participants, and could boost returns too. On the other hand, the associated fees, transparency and risks could bring problems for both retirement plan participants and sponsors. Read on for insights from national risk management experts. 

Unprecedented Pressure for Plan Sponsors

An executive order signed in summer 2025, directs federal agencies, including the Department of Labor (DOL), to provide guidance, and potential regulatory adjustments, for the inclusion of private equity and other alternative assets as 401k investment options. As Richard Clarke, national risk management expert, and chief insurance officer at Colonial Surety Company, points out, “Private markets previously had been available only for institutions or ultra-high net worth individuals,” and they have the potential to generate increased returns for 401k savers:

Private equity funds have enjoyed a good track record for the last couple of years, outperforming the stock market. A survey earlier this year by the NAPA Advisor Research Institute, a research arm of the National Association of Plan Advisors, found broad agreement among advisors on the benefits of private market investments, including diversification (cited by 67% of advisors as important), the potential for increased investment returns (50%), and the potential to reduce volatility (64%).

With retirement plan sponsors and advisors exploring the PE investment opportunities coming to 401k plans, it’s imperative to take the decisions associated with investment menus ever more seriously. Clarke reminds us that although new asset classes may yield high rewards, they are also accompanied by rising risks “due to their higher fees, liquidity strains and less established nature.” Indeed, amidst the swirl of information about new options for 401k plans, Clarke observes that one thing seems certain for the employers who sponsor plans—-increased uncertainty and complexity to manage:

• Plan sponsors are required by the Employee Retirement Income Security Act to act in the best interests of plan participants. This includes monitoring and managing investment options, controlling costs, and ensuring participants are educated to make informed decisions. With private markets thrown into the mix, it makes these obligations more challenging. Plan sponsors must evaluate private market investments, provide clear communications to plan participants on fees and disclose accordingly, and monitor for options that fit participants’ needs.

• The administrative burden also increases as plan sponsors must provide detailed and ongoing disclosures about the costs, structure and risks of private market investments as well as continuously oversee private market funds….

• With so many items to juggle, an error can snowball and lead to an alleged fiduciary breach, damaging both financially and reputationally to an employer…. Plan sponsors must remain vigilant in ensuring they have the proper guardrails in place to avoid the risk of lawsuits.

To mitigate the risks associated with their increasing responsibilities, it’s best for retirement plan sponsors to protect themselves, keeping in mind that fiduciary liability insurance is the only form of coverage that shields them personally in the face of allegations of a fiduciary breach. Under the high standards of ERISA law, a single mistake related to the selection and monitoring of investment options, can lead to investigations and lawsuits. Even if nothing has been done wrong, defense averages over $600 per hour in ERISA cases, and neither the ERISA fidelity bond (required for the protection of the plan–not the sponsor), nor traditional business insurance, covers retirement plan sponsors in the face of ERISA investigations, penalties or lawsuits.

Investment Menus?

The current flurry of information and ideas surrounding the inclusion of PE investments in 401k plans, is not of course the only cause for concern when it comes to investment menus. Indeed, the investments and fees associated with ERISA retirement plans have been under intense scrutiny for over a decade. Related to investment menus, for example, Rick Pearl, a partner at the Faegre Drinker law firm points to Section 404(c) of ERISA, and offers these pointers for retirement plan sponsors:

A significant requirement is that that plan offers a menu of investment options that span the risk-reward spectrum. However, fiduciaries must still ensure the overall prudence of the plan’s investment offerings. A fiduciary does have an obligation to be conversant in the characteristics of an investment option that might affect the goals of the investment…“So, although the plan fiduciaries don’t have to be experts, if there are fees or other considerations that are affecting the fund or the investment option that they have, then it is the obligation of the fiduciary to understand those considerations and ask questions of their expert advisers.”

Good To Remember

Colonial Surety Company helps retirement plan sponsors mitigate their many risks with an affordable, tailored insurance package. Armed with our coverage, for a few dollars a day, you’ll have defense costs and penalty limits up to $1,000,000 if faced with alleged or actual breaches of duty in connection with the employee retirement plan. Cyber liability coverage is included at no extra cost, providing additional protection–for the plan and company–against regulatory actions related to data and privacy, as well as expert response services. 

Protect Yourself and Your Company, In Minutes, Now: 

Fiduciary +Cyber Liability Insurance for Retirement Plan Sponsors