The Independent Institute is pressing Washington to roll back key protections in the Employee Retirement Income Security Act, arguing that current rules prevent 401(k) participants from taking greater control over their portfolios and accessing private market opportunities.
A new commentary published by Scott Beyer, a columnist fellow at the think tank, describes the 401(k) as “one of the most consequential financial inventions of the last half-century,” but contends that plans “are not as high-yielding as most plan owners might think.”
The Independent Institute commentary points to menus dominated by mutual funds, target-date funds, and bond funds, with most plans excluding private investments, crypto, and leverage beyond limits set by the Internal Revenue Service.
Beyer attributes that constraint not to recordkeepers or technology, but to ERISA’s fiduciary regime. The law, he writes, “imposes a mindset that’s both infantilizing and outdated, and in practice is designed less to empower workers than protect employers from lawsuits.” Litigation risk, he argues, pushes employers and committees to deem anything “too volatile, complex, illiquid, or unconventional” as a potential liability, even when those investments are mainstream.
That tension has been on display in a wave of lawsuits targeting fees and fund lineups. One case involving Northwestern University, which made it to the Supreme Court, ended in a judgment against the institution for offering options that were too risky or expensive.
Beyer also pointed to industry data showing ERISA-related lawsuits jumping 35% in 2024, with a rise in class actions against both defined-contribution and defined-benefit plans. In his view, that dynamic “limits retirement savings, encourages frivolous lawsuits, and feeds lawyers more than it actually protects anyone.”
Regulators and many lawmakers, however, continue to stress the original rationale behind strict fiduciary standards. Historically, 401(k) sponsors have been expected to vet options and provide diversified lineups that reduce the risk of large losses for workers. Critics of expanded access to private equity, crypto and other alternatives – as urged by President Donald Trump in an August executive order – warn that complex fee structures and high volatility could undermine retirement security for participants who may not fully understand the risks.
Those concerns helped prompt a letter from Senator Elizabeth Warren and other lawmakers to the Department of Labor and the Securities and Exchange Commission, questioning how regulators would protect workers if alternative assets are allowed more broadly in plans and what that would mean for sponsors’ oversight and litigation exposure.
The policy discussion has intensified alongside efforts to open the door to private markets in defined-contribution plans. The Biden administration issued language discouraging pension funds from adding private equity, though Trump's executive order directed regulators to study ways to make options such as crypto and real estate available in 401(k)s.
For what it's worth, a Morningstar analysis released in November modeled semiliquid private equity and private credit funds within 401(k) portfolios and found that “semiliquid private market allocations may improve retirement outcomes across participant cohorts – albeit modestly.” The report emphasized that no scenario produced worse outcomes than a base case without private markets, but the biggest gains accrued to higher-balance savers with lower expected Social Security replacement rates.
Morningstar tested allocations capped at 15% of assets and saw small increases in a “success ratio” measure across prepared, vulnerable and critical cohorts, while underscoring that most retirement income still comes from Social Security and that higher savings rates matter more.
The authors served up their findings with a grain of salt, noting that unmodeled fund-level expenses “could have a big impact and lead to very different results," alongside manager selection and dispersion in private markets.
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