DOL moves to democratize access to alts in 401(k)s

Topline

• DOL moves to expand access to alternatives in 401(k)s

• Spotlight on the States: QSBS

• FSOC resets framework for nonbank designations

• Quick hits

• Upcoming events

Programming note: With Congress in recess, Carta Policy Weekly will be taking its Spring Break as well. We'll be back on April 14.

DOL moves to expand access to alternatives in 401(k)s

The Department of Labor (DOL) issued its long-awaited proposal to clarify how ERISA fiduciary duties apply to private market investments in 401(k) plans, marking a clear shift from prior guidance that discouraged their inclusion. The proposal implements the August 2025 executive order directing regulators to expand access to alternative assets and marks the clearest signal yet that the more than $14 trillion in defined-contribution plans is now realistically in play for private markets.

At a high level, the proposal does not relax existing ERISA standards. Instead, it establishes a process-driven framework for fiduciaries to satisfy them when evaluating more complex and less liquid investments. At the center of the proposal is a process-based safe harbor designed to reduce litigation risk. Fiduciaries that follow a documented prudent process are entitled to deference from courts, even if investment outcomes underperform. The framework is asset-neutral: private equity, private credit, and digital assets are not inherently imprudent. At the same time, the proposal preserves ERISA’s core guardrails—the duty of loyalty, conflict-of-interest prohibitions, and diversification requirements—which, in practice, point toward structured access rather than direct exposure, favoring diversified, professionally managed vehicles with private market sleeves over standalone allocations to private assets.

The process: Under the proposal, plan fiduciaries must evaluate six factors when considering alternatives: performance, fees, liquidity, valuation, benchmarking, and complexity. Valuation and liquidity are the gating issues. The proposal requires that private assets be priced through a reliable, conflict-free process with sufficient frequency to support participant transactions, and that liquidity terms align with how and when participants can access their funds. Fiduciaries are not required to select the lowest-cost option, but must demonstrate that fees are appropriate relative to value delivered. They must also either have the expertise to conduct that evaluation themselves or rely on qualified intermediaries. Process, not outcome, is the operative standard, but the documentation bar is high.

The timing: The push to open 401(k)s to alternatives is arriving at a moment when those markets are being tested. Private credit vehicles have faced redemption pressure and liquidity constraints; private equity returns remain muted; and crypto continues to exhibit volatility. The result is a tension between expanding access and ensuring investor protection—one that will likely shape how quickly and in what form these products are adopted.

Why it matters: The inclusion of alternative assets in 401(k)s has not historically been limited by legal prohibitions, but by fiduciary aversion to litigation risk. This proposed rule aims to address that by introducing a process-based framework that gives fiduciaries greater confidence that their decisions will be upheld. The constraint on retirement capital flowing into private markets is no longer whether alternatives are allowed; it is whether fiduciaries can demonstrate a defensible, well-documented process. The winners will be products and platforms that can standardize valuation, manage liquidity, and provide fiduciaries with a defensible framework for decision-making. Plan sponsors and their advisors now face a process, diligence, and documentation standard, not a permission question.

What’s next: The proposal enters a 60-day comment period, with coordination across the DOL, Treasury, and SEC underscoring its policy priority. Expect acceleration in product development around interval funds, target-date structures, and other vehicles designed to deliver private market exposure within ERISA constraints, alongside growing demand for infrastructure that can support valuation, liquidity management, and fiduciary oversight.

Spotlight on the States: QSBS

Founders, their investors, and their employees dodged a bullet in New York after the state abandoned budget proposals that would have effectively eliminated state-level conformity with Section 1202 Qualified Small Business Stock (QSBS). The proposal, which the tech community aggressively pushed back on, would have increased tax burdens on startup equity at the exact moment companies and talent are already navigating macro headwinds and a tighter capital environment.

But while New York stepped back, other jurisdictions are moving in the opposite direction. Several states—notably California and Pennsylvania—have historically not conformed to federal QSBS treatment, and more states are considering this path. Recently, Washington, D.C. voted to decouple, and there are active efforts to eliminate or limit state-level QSBS in states including Oregon and Maryland, underscoring a growing divergence in how states treat startup equity.

Why QSBS matters: QSBS has long been one of the most effective tools for driving early-stage investment. By allowing eligible shareholders to exclude a significant portion of gains from federal taxes, it aligns incentives across founders, employees, and investors and helps attract capital and talent to high-risk, high-growth companies. Recent federal changes expanded those incentives—raising the gross asset threshold from $50M to $75M and introducing earlier, phased eligibility—allowing more companies and stakeholders to benefit. Carta and our ecosystem partners successfully advocated for these changes, helping reinforce QSBS as a core pillar of U.S. capital formation policy.

Bottom line: The QSBS debate is shifting from Washington to the states. Even as federal policy moves toward expansion, state-level decoupling threatens to erode the consistency and effectiveness of the incentive. A patchwork of state-level rules undermines that goal, creating complexity for companies and diluting the impact of one of the few tax policies directly tied to startup formation and growth.

FSOC resets framework for nonbank designations

The Financial Stability Oversight Council (FSOC) unanimously proposed new guidance that re-centers its approach to systemic risk oversight, prioritizing activities-based interventions and narrowing the path to firm-specific designations. The proposal effectively restores the 2019 framework, reversing the Biden-era shift toward broader entity-based authority.

The key change is sequencing. FSOC would address systemic risks through market-wide or activity-based tools first, turning to firm-level designations only if those risks cannot be mitigated otherwise. The proposal also tightens the standard for what constitutes a “threat to financial stability,” introduces a formal cost-benefit requirement, and creates an off-ramp for firms to remediate risks before designation proceedings advance.

Why it matters: The proposal reduces near-term designation risk for nonbank financial companies, including private equity and private credit, while shifting regulatory focus toward market practices rather than institutions, making formal designations less likely. That said, the authority itself remains in place, and without congressional action to revise the underlying Dodd-Frank framework, a future administration could readily reverse course.

Quick hits

• Meta ordered to pay $375 million in New Mexico trial. Back-to-back jury verdicts found Big Tech platforms liable for harms to minors, including a $375M award against Meta in New Mexico and a separate ruling in Los Angeles holding both Meta and Google liable for designing addictive platforms. The cases centered around product design and algorithmic amplification, testing the boundaries of Section 230 and signaling a potential pathway for claims that fall outside traditional protections for user-generated content.  While the decisions are likely to be appealed, they increase litigation risk across the tech sector and inject new urgency into congressional efforts around kids’ online safety, alongside continued pressure to define how liability frameworks apply to AI-driven systems.

• FTC and DOJ reopen HSR rulemaking. The Federal Trade Commission and Department of Justice are weighing a new rulemaking for the Hart-Scott-Rodino premerger notification process after a federal court vacated the Biden-era HSR form revisions in February. The agencies are accepting public comment on possible changes, including disclosure of CFIUS filings and sovereign wealth fund involvement; expanded reporting on certain military and intelligence contracts even absent direct overlap; new reporting obligations for acquihires, reverse acquihires, certain IP-license structures, and convertible securities; limits or clarifications to the 10% “solely for investment” exemption; and possible HSR treatment for large institutional acquisitions of single-family homes. There likely won’t be a return to the Biden-era HSR expansion, but it won’t be a full rollback either. Depending on where the agencies land, filing burdens and deal costs could increase for PE, particularly for roll-up strategies, minority investments, and other nontraditional deal structures.

• Judge blocks Pentagon from labeling Anthropic AI a supply chain risk. A federal judge in California blocked the Trump administration’s blacklisting of Anthropic, finding the Pentagon’s supply chain risk designation likely amounted to unconstitutional First Amendment retaliation after the company publicly opposed unrestricted military uses of its Claude model. The ruling is paused for seven days to allow for an appeal. A separate challenge remains pending in the D.C. Circuit under a different statutory authority, where the government may have a better footing, so Anthropic’s exposure is not fully resolved. The designation, which has never been applied to an American company, has already disrupted commercial deals and could materially impact revenue, according to Anthropic.

• Trump Administration plans to require higher wages for H-1B visa holders. The Trump Administration is proposing to raise wage requirements for H-1B and related visas by 21% to 33%, alongside changes that favor higher-paid applicants and increase application costs. The DOL proposal signals a shift toward price-based restrictions on skilled immigration. Higher wage floors and fees will increase hiring costs and constrain access to global talent, particularly for startups and tech companies. The changes also risk narrowing a key pipeline for international students trained in the U.S., even as demand for high-skilled labor remains strong.

• House Financial Services examines the role of tokenization. The House Financial Services Committee held a hearing examining tokenization’s role in modernizing U.S. capital markets, producing a notable bipartisan consensus: tokenized securities are inevitable, and the existing regulatory framework is unprepared for this shift. Members agreed the existing framework was written for a pre-blockchain era and needs updating to preserve investor protections while keeping pace with technology. Witnesses identified outdated tax laws, punitive bank capital rules, and the current custody framework as structural barriers requiring congressional action that cannot be resolved through agency guidance alone. The hearing reinforces the SEC’s broader push to bring tokenized assets into the mainstream infrastructure and could shape the Senate Banking CLARITY Act markup—the remaining primary vehicle for resolving the broader statutory gaps—set for the latter half of April.

Upcoming events

• Carta Webinar: VC Masterclass: Navigating Liquidity and LP Communication in 2026 - April 7 at 10:00 a.m. PT/1:00 p.m. ET

• Carta Webinar: PE Compensation Series with Davis Polk, Part 3: Management Rollovers and Incentive Equity Structures for Portfolio Companies - April 15 at 10:00 a.m. PT/1:00 p.m. ET

• House Financial Services Committee Hearing: Safeguarding Main Street: Combatting Fraud and Exploitation in Our Capital Markets - April 15 at 7:00 a.m. PT/10:00 a.m. ET

• House Financial Services Committee Hearing: Promoting Access to Credit for Everyday Americans - April 16 at 7:00 a.m. PT/10:00 a.m. ET

• National Institute of Standards and Technology: Workshop on Blockchain and Distributed Ledger Technologies - April 16 at 7:00 a.m. PT/10:00 a.m. ET

• House Financial Services Committee Hearing: Diversifying Risk: The Benefits of Reinsurance and Credit Risk Transfers - April 22 at 7:00 a.m. PT/10:00 a.m. ET

• House Financial Services Committee Hearing: Prioritizing Main Street: Evaluating the Impact of Capital Proposals on Economic Growth and American Communities - April 28 at 7:00 a.m. PT/10:00 a.m. ET

• Securities and Exchange Commission: Small Business Capital Formation Advisory Committee Meeting - April 28 at 7:00 a.m. PT/10:00 a.m. ET

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