Fiduciary: The First… and Last Line of Defense Protecting America's Savers

Aug 27

13 min read

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by Richard Bavetz, FRC℠ | August 25, 2025

Why Fiduciary—and Why They Matter More Than Ever

In America's vast and often opaque financial system, fiduciaries stand as both the first and last line of defense for millions of retirement savers. The fiduciary duty is the legal and moral obligation to act solely in the best interests of clients and plan participants, guided by the highest standard of care in finance. Unlike brokerage firms, wirehouses, or fund product salespeople who operate under loose "suitability" standards, fiduciaries shoulder a responsibility akin to that of trustees. Their role is not advisory "window dressing"—it is the legal backbone protecting America's workers from malfeasance, abuse, and financial erosion.

America's retirement system channels trillions of dollars through a maze of products, providers, and incentives that do not automatically align with workers' best interests. That is precisely why fiduciaries exist. Under ERISA, a fiduciary must act solely in the interest of participants and beneficiaries, with the care, prudence, skill, and diligence that a prudent expert would use; diversify investments; and pay only reasonable expenses. Those aren't suggestions—they are enforceable duties that courts and the Department of Labor (DOL) repeatedly ascribe to the highest standard of care in finance, known as the Fiduciary Standard. In plain terms, a fiduciary's job is to maintain the integrity of the retirement system when the market's temptations and lobbying pressures are pointing in the other direction. ([DOL][1])

This standard is critical; the modern financial landscape is a virtual minefield. It is littered with high-cost products marketed as "innovations," or opaque investment vehicles designed to enrich managers rather than participants. Add to that to the aggressive lobbying efforts to push untested or ill-suited products into retirement plans. Fiduciaries are the guardians ensuring that workers' retirement dollars—the lifeblood of future financial security—are protected from schemes that promise much but deliver little.

From the moment a worker enrolls in a plan, a prudent fiduciary serves as the first line of defense: educating participants, guiding them toward diversified, low-cost, transparent choices, and away from predatory or needlessly complex products. And because ERISA imposes a continuing duty to monitor—not a "set it and forget it" obligation—that same fiduciary is also the last line of defense, responsible for culling imprudent options from the menu as facts change, markets evolve, or costs creep.

The Supreme Court had a lot to say about the ongoing duty to monitor and remove imprudent options in Tibble v. Edison (2015). While Hughes v. Northwestern University (2022) clearly reinforced that offering a few good options does not excuse keeping bad ones. ([Justia Law][2], [Supreme Court][3], [Paul, Weiss][4])

The First Line... Literacy, Good Habits, & Guardrails

Education and prevention processes must be key to plan design. Formal financial literacy programs and risk assessment are essential tools in shaping good savings behavior. A fiduciary helps participants avoid dangerous missteps such as chasing speculative investments, falling prey to predatory high-fee products, or overexposing themselves to inappropriate levels of risk.

In this sense, fiduciaries act as the first line of defense—guiding savers toward prudent diversification, long-term asset allocation, and disciplined contribution habits. Just as physicians steer patients away from harmful practices, fiduciaries help participants avoid self-inflicted financial wounds:

A fiduciary's preventive work starts with financial literacy and plan design that nudge good behavior:
Defaulting and re-enrolling into appropriate target-date or risk-based options to curb performance-chasing.
Fee transparency and benchmarking across all plan components—investment, recordkeeping, advice—because dollars not lost to frictional costs compound for participants.
Risk-appropriate portfolios that avoid concentration, style drift, and opaque structures with hard-to-measure risks.
Vetting providers for conflicts (e.g., revenue-sharing, platform "pay-to-play") and demanding total cost clarity, including trading and implementation costs that never appear in a fund's simple expense ratio.

This front-end work is not just good hygiene; it is part of the legal duty of prudence. And it is ongoing. If an investment underperforms its prudent peers, net of fees—particularly when a cheaper, simpler, and more transparent alternative exists—a fiduciary cannot simply shrug and say, "Participants can choose something else." Hughes made clear that a long menu doesn't cure imprudence; the bad apples must be picked out. ([Supreme Court][3], [Faegre Drinker][5])

The Last Line of Defense... What Never Belongs on a 401(k) Menu

Because fiduciaries own the menu, they own the liability. That's especially true for illiquid, expensive, opaque, or hard-to-value instruments that bring institutional due diligence burdens without delivering commensurate value for ordinary workers. Two categories raise obvious red flags:

Private Equity (PE) in 401(k) Plans

Over the past few years, private equity firms have lobbied hard to open the 401(k) channel. The pitch typically relies on institutional precedent ("pensions and endowments do it"), diversification rhetoric, and the notion that public markets no longer offer the same breadth of opportunities. But participant-directed Defined Contribution (DC) plans are not endowments, and the DOL's own guidance—while evolving—makes the prudence hurdles painfully clear.

In 2020, the DOL said a fiduciary wouldn't violate ERISA solely by using a professionally managed asset-allocation fund with a limited PE sleeve, provided the fiduciary runs a rigorous, apples-to-apples process and the PE slice stays tightly controlled within a diversified vehicle. That letter also emphasized that PE brings long-term time horizons, illiquidity, complex valuation, and typically higher fees, all of which the fiduciary must square with a 401(k) 's liquidity and disclosure realities. ([DOL][6])

In late 2021, the DOL issued a supplemental statement cautioning that some had read the 2020 letter far too optimistically; it reiterated that typical 401(k) fiduciaries (especially at small and midsized plans) may lack the resources and expertise to evaluate and monitor PE inside participant options prudently. Although the 2021 statement was rescinded in August, its detailed articulation of the risks should remain as a sober checklist for prudence. Rescission is not endorsement; the core obligations of loyalty, prudence, and cost sensitivity—as a counter to complex fees, subjective valuations, and longer lockups— remain unchanged. ([DOL][7])

The practical upshot: adding Private Equity to a 401(k) menu can inflate oversight costs—specialist consultants, independent valuation work, legal opinions, enhanced disclosures, and ongoing monitoring—often erasing any theoretical diversification benefit. A fiduciary must still compare that PE-infused vehicle to plain-vanilla, low-fee alternatives that achieve similar risk/return targets without those burdens. On an expected-value basis—net of fees, complexity, and operational risk—PE typically fails the DC prudence test for the average participant. ([DOL][6])

Just as troubling is the structural temptation: when private markets freeze up or distributable cash flows slow, channeling 401(k) inflows into illiquid pools can look like a convenient salve for PE managers—turning DC savers into liquidity providers of last resort. With over $12 trillion in 401(k) assets at stake, the influx of PE could create massive inflows that artificially inflate valuations, allowing PE firms to offload underperforming or "bad paper" assets at the expense of America's workers. This scenario echoes the derivative markets in investment banking during the lead-up to the 2008 financial crisis, where complex, opaque instruments like mortgage-backed securities were packaged and sold as safe, only to unravel and cause systemic devastation. Similarly, PE's high leverage and lack of transparency could pose systemic risks if broadly adopted in retail retirement plans, turning workers' savings into unwitting buffers for elite financial maneuvers. Complexity packaged as sophistication, with risk quietly pushed onto end-investors until the cycle turns.

Crypto (to a Lesser Extent)

In 2022, the DOL warned plan fiduciaries to exercise extreme care before adding crypto exposure to 401(k) menus, citing volatility, valuation uncertainty, fraud/theft risk, and immature custody infrastructure. In 2025, that cautionary release was rescinded, reverting the Department to a more neutral stance on investment types.

While the lobbying effort for Crypto in retirement plans is less advanced, the risks remain concerning. Fiduciaries must question whether speculative instruments with no intrinsic value, unpredictable price swings, and evolving legal frameworks can ever satisfy ERISA's duty of prudence.

None of that changes ERISA's underlying foundation: a fiduciary must show prudence, loyalty, cost-sensitivity, and act in the best interest of the participant population. Due to the operational complexities of Crypto, achieving that bar for a core plan option remains quite challenging. ([DOL][8], [Eris A Practice Center][9], [Proskauer][10])

Where is this all headed? Is it conceivable to imagine new lobbying efforts being made by the monolith of financial institutions to change the formal definitions of Prudence and Loyalty?

Litigation Reality Check: ESG Lessons of Underperformance = Liability

PE investments raise the hair on the back of every plan fiduciary's neck. But why? Courts are increasingly unforgiving when plans retain options that, in context, look imprudent. Consider three essential signposts:

Ongoing Duty to Monitor

Tibble v. Edison affirmed that fiduciaries must continually monitor and, when warranted, remove imprudent options. Time does not launder a bad decision. ([Justia Law][2])

Menu Size Doesn't Save You

Hughes v. Northwestern held that sprinkling good options among bad ones doesn't cure imprudence. Fiduciaries must clean the entire menu. ([Supreme Court][3])

Disclosures Don't Equal "Actual Knowledge"

In Intel v. Sulyma (2020), the Supreme Court explained that simply providing disclosures does not, by itself, give participants "actual knowledge" for statute-of-limitations purposes. Translation: fiduciaries can't hide behind disclosure—process and prudence drive outcomes. ([Supreme Court][11], [Vorys][12])

Recent ESG-related cases highlight the risks of failing to prioritize financial benefits. In January 2025, a federal judge ruled that American Airlines violated its ERISA duties (specifically the fiduciary duty of loyalty) by allowing non-economic considerations, namely ESG, to influence plan investments. This is an emphatic reminder that "sole interest" means just that. Whatever one's view of ESG, the legal takeaway is simple: if an option's selection or retention results in financial underperformance relative to prudent peers, fiduciaries face heightened risk. The fact that courts have dismissed many identical lawsuits attacking BlackRock target-date funds doesn't diminish this reality; courts are evaluating facts, process, and performance case by case; the risks remain high. ([Reuters][13], [Wall Street Journal][14], [Financial Times][15], [PSCA][16], [Faegre Drinker][17])

Delta Air Lines, IBM, and Intel faced similar lawsuits, alleging breach of fiduciary duty for offering funds with excessive fees and poor performance.

The legal precedent is clear: when funds fail to meet reasonable cost and performance standards, fiduciaries are exposed. Now, extend that logic to PE. If ESG-tilted mutual funds—ostensibly liquid, regulated, and relatively transparent—can create litigation risk when returns disappoint, then illiquid, expensive, opaque PE sleeves in participant options amplify that risk many times over. Now imagine if they underperform to boot.

That is the very definition of an asymmetric downside for fiduciaries. Nevertheless, it appears there are plenty of PE enthusiasts prepared to defend an indefensible proposition to the bitter end.

How Much Worse is PE Than ESG?

PE investments touch every fiduciary nerve because they all move in the wrong direction.

Higher Costs: Management + performance fees often double or triple the cost of traditional funds.
Greater Risk: Concentrated bets on illiquid assets amplify downside exposure.
Opaque Valuations: Unlike public equities, PE valuations are subjective, creating reporting risks.
Minimal Value: After adjusting for fees and illiquidity, PE adds little incremental return to justify inclusion.

Thus, fiduciaries who approve PE in 401(k)s would not only jeopardize participants' retirement security but also invite personal liability for breaching ERISA's duties of loyalty and prudence.

I dare say, "Nary a fiduciary soul will venture into these woods."

The False Equivalence: 401(k)s vs. Endowments and Pensions

PE proponents love pointing to institutional allocations. But endowments, sovereign wealth funds, and public pensions are playing a different game on a different field.

Time Horizon

Endowments and Defined Benefit pensions invest across decades (even generations), can tolerate illiquidity, and can rebalance with incoming contributions or other pools of capital. 401(k) participants need flexibility for rollovers, withdrawals, rebalancing, and retirement income.

Liquidity

DC plans must accommodate participant-directed exchanges, loans, hardship withdrawals, QDROs, and retirement rollovers—with daily valuation and operational clarity. Illiquid sleeves inside participant options complicate that mission. Endowments can withstand long lockups; participants cannot.

Resources & Governance

Institutions have sophisticated teams of analysts, dedicated consultants, and negotiated fee structures. Typical 401(k) committees don't. Even sophisticated institutions have struggled with transparency in private markets, fees, and valuation comparability. Look no further than CalPERS' long-running scrutiny over private-equity fees and disclosure, or the PSERS (Pennsylvania) saga involving performance reporting errors and investigations—reminders that even the pros can stumble in complex private markets. ([Los Angeles Times][18], [Reuters][19], [Spotlight PA][20])

Track Record

Many institutional giants have faced significant difficulties due to PE overexposure. The Kentucky Retirement System, for example, faced a crisis after heavy allocations to hedge funds and PE led to underfunding and high fees—illustrating how Private Equity's opaque structures, layer-cake fees, and complexity can ignite controversy and erode trust when outcomes disappoint. The eventual litigation against BlackRock and others culminated in a $227 million settlement, implicating several firms over allegations of mismanagement. The California State Teachers' Retirement System (CalSTRS) also grappled with PE underperformance and valuation disputes. Other state plans (New Jersey and Illinois) have also faced controversy and losses tied to opaque, high-fee PE deals. If deep-bench institutions face these headwinds, exporting the model to participant-directed 401(k)s is, at best, wishful thinking, or worse, completely reckless. ([SEC][21], [Kentucky Lantern][22])

The Real-World Cost of Sophistication: A Value-Offsetting Burden

Let's be crystal clear about what it takes to use PE in a 401(k) menu prudently—even indirectly inside a diversified vehicle, e.g., a Target Date Fund.

Specialized Due Diligence

Independent evaluation of GP track records, strategy persistence, fee waterfalls (including transaction/monitoring fees and portfolio-company charges), key-person and claw-back provisions, LPAC governance, and side-letter parity.

Valuation and Reporting Controls

Documented methods tied to ASC 820 "fair value" with independent checks, plus processes to reconcile capital calls/distributions while maintaining daily liquidity at the wrapper level, particularly to satisfy participant redemptions. ([DOL][6])

Operational Readiness

Recordkeeper and custodian capabilities for complex vehicles; participant-level disclosures that are comprehensible and accurate; policies for transfer restrictions, blackout periods, or gates if liquidity strains emerge.

Comparative Analysis

A disciplined, documented comparison against non-PE alternatives that target the same risk/return outcome at lower, simpler, more transparent cost—because fiduciaries must justify why the PE sleeve improves participant outcomes net of all incremental burden. ([DOL][6])

Every one of these steps adds cost. In DC plans, those costs typically flow back to participants—often turning the "diversification benefit" into a fee-and-complexity penalty—effectively offsetting any theoretical value the investments might provide. For small and mid-sized plans in particular, these administrative burdens are prohibitive. The DOL's own letters make this explicit: fiduciaries must weigh the added layers of risk, liquidity constraints, and fees against the simplicity and efficiency of public-market solutions. ([DOL][6])

What Belongs on a 401(k) Menu?

Prudence in DC plans is not mysterious. It looks like:

Core building blocks (broad U.S./international equity, core bonds, TDFs, or model portfolios) that are liquid, diversified, and low-cost.
Robust fee benchmarking and share-class hygiene (institutional or CIT structures where appropriate).
Quarterly monitoring against clear, forward-looking criteria: process discipline, organizational stability, risk controls, and net-of-fee performance vs. meaningful peers and benchmarks.
Documentation that shows the fiduciary considered cost, value, risk, and alternatives—then acted.

This is what courts and the DOL expect, and it is what gives participants the best odds of long-term success. Again, a fiduciary's job is to remove friction and opacity, not to import them.

Liability is Tied to Process, But Process Must Reflect Reality

Some final legal points tighten the screws:

Actual Knowledge Standard

In Intel v. Sulyma, the Court held that disclosures alone don't start the shorter three-year limitations clock—participants must genuinely understand the facts. That means fiduciaries should not rely on a "we disclosed it" defense, particularly for complex, non-transparent strategies. ([Supreme Court][11])

404(c) Does Not a Shield Make

Even when participants direct their own investments, 404(c) does not relieve fiduciaries of prudence duties for selecting and monitoring the menu and its managers. The DOL has said so explicitly. ([DOL][7])

Put bluntly, if a plan adds an illiquid, expensive, and hard-to-value sleeve to a participant option and it underperforms—or creates operational headaches—the committee bears the responsibility.

Another Brief Note on ESG—and the Implications for PE

The January 2025 ruling by Judge O'Connor stated that American Airlines breached its ERISA duties by allowing ESG considerations to influence retirement plan investments in ways that were not strictly focused on participants' financial benefits. Even if one disagrees with the ruling, the legal lesson is unmistakable: fiduciary loyalty and prudence are financially anchored.

If a liquid and regulated fund can trigger liability when facts suggest non-pecuniary motives in fund selection or underperformance, then adding an illiquid PE alternative—with higher fees, less transparency, and more valuation subjectivity—creates outsized exposure for employers and their committees. ([Reuters][13], [Wall Street Journal][14], [Financial Times][15])

Holding the Line

Every 401(k) has a fiduciary. That fiduciary is responsible for assessing the cost, value, risk, and viability of each option and for continuously monitoring those choices. Recent cases show that underperformance and non-pecuniary motives can, by themselves, create liability. If that's true for liquid ESG-tilted mutual funds, it is exponentially truer for private equity sleeves inside DC menus. The DOL's own letters (regardless of shifting political winds) catalog the very problems DC plans exist to avoid: illiquidity, higher and layered fees, opaque valuations, operational complexity, and participant-communication challenges. ([DOL][6])

The comparison to endowments and pensions is spurious at best. Those institutions have different horizons, different liquidity profiles, and different governance, and even they stumble in private markets. Importing their playbook into participant-directed 401(k)s invites avoidable risk, higher cost, and litigation exposure without a compelling net benefit for the average saver. ([Los Angeles Times][18], [Spotlight PA][20])

The fiduciary standard ensures that retirement savings remain focused on low-cost options that are diversified, transparent, and liquid investments—the proven formula for building long-term wealth. By scrutinizing cost, risk, and value, a fiduciary provides a vital safety net. They protect participants not only from Wall Street's more predatory impulses, but also from the broader system's tendency to prioritize profits over people.

It goes much further than a regulatory requirement—it is a moral imperative in a system where financial innovation too often masks self-interest. The recent push to insert private equity into 401(k) plans is not about enhancing participant outcomes; it is about creating new inflows to support an industry burdened by its own excesses.

The fiduciary model is the safety system that keeps America's retirement dollars aimed at their purpose: delivering durable, risk-appropriate, net-of-fee returns for workers. That model makes fiduciaries both the first line of defense—educating participants, preventing costly mistakes, and steering them to transparent, low-cost, diversified options—and the last line of defense—blocking ill-suited products from ever reaching the menu.

America's savers need protection, not experimentation. Fiduciaries should continue to do what the law and common sense demand: keep menus simple, transparent, diversified, and cheap; document a rigorous process; and say "no" to illiquid, expensive, and opaque strategies that add more headline risk than participant value. In an industry too often tempted by fresh inflows to absorb yesterday's problems, fiduciaries must hold the line—ensuring that the nation's retirement system remains a bastion of prudence, transparency, and long-term value.

That is how we protect America's savers—first and last.

[1]: "Meeting Your Fiduciary Responsibilities"

https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/publications/meeting-your-fiduciary-responsibilities-booklet-2021.pdf

[2]: "Tibble v. Edison Int'l | 575 U.S. 523 (2015)"

https://supreme.justia.com/cases/federal/us/575/523/

[3]: "19-1401 Hughes v. Northwestern Univ. (01/24/2022)"

https://www.supremecourt.gov/opinions/21pdf/19-1401_m6io.pdf

[4]: "Supreme Court Clarifies ERISA Fiduciary's Duty of Prudence"

https://www.paulweiss.com/practices/litigation/litigation/publications/supreme-court-clarifies-erisa-fiduciary-s-duty-of-prudence

[5]: "Supreme Court Decides Hughes v. Northwestern University"

https://www.faegredrinker.com/en/insights/publications/2022/1/supreme-court-decides-hughes-v-northwestern-university

[6]: "Information Letter 06-03-2020 | U.S. Department of Labor"

https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020

[7]: "U.S. Department of Labor Supplement Statement on Private Equity in Defined Contribution Plan Designated Investment Alternatives | U.S. Department of Labor"

https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020-supplemental-statement

[8]: "Compliance Assistance Release No. 2022-01"

https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/compliance-assistance-releases/2022-01

[9]: "DOL Rescinds 2022 Guidance Cautioning Against 401(k ..."

https://www.erisapracticecenter.com/2025/05/dol-rescinds-2022-guidance-cautioning-against-401k-plan-investments-in-cryptocurrencies/

[10]: "DOL Rescinds 2022 Guidance Cautioning Against 401(k) ..."

https://www.proskauer.com/blog/dol-rescinds-2022-guidance-cautioning-against-401k-plan-investments-in-cryptocurrencies

[11]: "18-1116 Intel Corp. Investment Policy Comm. v. Sulyma

https://www.supremecourt.gov/opinions/19pdf/18-1116_h3cj.pdf

[12]: "Supreme Court's Decision in Intel Corporation Investment ..."

https://www.vorys.com/publication-Supreme-Courts-Decision-in-I-Intel-Corporation-Investment-

[13]: "American Airlines' focus on ESG in retirement plan is illegal, US judge rules"