Market Update | Solid September Ends with Government Shutdown

Following the much-anticipated Federal Reserve rate cut on September 17th, equity markets surged during the month. The S&P 500 posted its fifth consecutive monthly gain, tacking on an impressive 3.7%, and finishing the third quarter up over 8%, while the Dow Jones Industrial Average (DJIA) gained 2.0% in September and 5.7% in the third quarter. Technology stocks continued to lead the way, sending the tech-heavy NASDAQ index up 5.7% in September. Even more impressive is the fact that the index is up over 11.4% in the third quarter. International markets also continued to post solid gains, with the MSCI EAFE Index adding 2.0% in the month while emerging markets jumped an impressive 7.2%. On the fixed income front, longer-term bond yields such as the 10-Year Treasury fell during the month, sending bond prices higher. The Bloomberg Aggregate Index was up 1.1% in September and has gained over 2% in the third quarter. 

The Commerce Department revised second quarter GDP growth to an annualized 3.8%, up from the earlier estimate of 3.3%, further easing recession fears. The revision was driven in large part by stronger-than-expected consumer spending and a drop in imports. While the data was encouraging in the short term, many analysts believe there may be significant deceleration going forward in part due to higher prices and a softening labor market. Regarding prices, the Federal Reserve’s preferred inflation gauge, Personal Consumption Expenditures (PCE), accelerated slightly in August from a year earlier. The PCE index tries to account for changes in how people shop when inflation rises and can capture, for example, when consumers switch from more expensive brands to cheaper store brands. This behavior, known as the "substitution effect", is a key reason why the Federal Reserve prefers the PCE price index over the Consumer Price Index (CPI) when assessing inflation. The Commerce Department announced that the PCE price index was up 2.7% in August from a year earlier, which was a bit higher than the 2.6% year-over-year increase in July and the most since February. Core PCE, which excludes the volatile food and energy components, showed a 2.9% increase in prices from August 2024, matching the increase seen in July. While the data wasn’t grossly higher than expected, it proved that inflation data remains sticky.

As for the labor market, weakness persists, as the average monthly non-farm payroll gains have shrunk to approximately 29,000 with the unemployment rate climbing to 4.3%, its highest rate since 2021. Just 22,000 jobs were added in August, a far cry from the 76,500 expected by economists. Moreover, the August data showed a revision to June’s numbers indicating that the economy actually lost 13,000 jobs during the month, which was the first negative job growth number in nearly four years. 

The Federal Reserve has a dual mandate of full employment and stable prices (inflation data). While inflation has not yet cooled to the Fed’s target of 2%, the unemployment figures for August ticked higher while job gains stalled. While the Fed grapples with sticky inflation data and a weakening job market, they are essentially caught between a rock and a hard place. On the one hand, the inflation data would preclude them from cutting rates, especially as the effects of President Trump’s tariffs have largely yet to be felt but are likely on the way. On the other hand, the softening job market calls for a rate cut. In the end, the Fed went ahead and reduced the federal funds rate on September 17^th for the first time this year, cutting the rate by 25 basis points to a range of 4.00% to 4.25%, in line with Wall Street expectations. Markets expect two more rate cuts by the end of 2025 and one more in 2026, with forecasts suggesting a target federal funds rate of around 3.6% by the end of 2025 and 3.4% by the end of 2026. 

The looming government shutdown came to fruition Wednesday morning (October 1^st) at 12:01 a.m. ET. The lack of progress and talk from federal agencies about how they would furlough workers during a stoppage made it more likely that we would see the first government shutdown since 2019, as Democrats and Republicans remained at a standstill on health care spending and a funding extension. The shutdown will mean there will be a delay in the release of economic data, including September’s non-farm payrolls, which would have been influential to the Federal Reserve’s next meeting in late October. If the shutdown persists, it could raise concern about the credit quality of U.S. debt which could hit Treasury prices and send yields higher. 

While markets finally received the rate cut they were looking for in September, with the expectation of two more to come by year end, relative uneasiness seems to loom. A government shutdown has occurred, inflation remains sticky, and a weakening labor market tainted the month, while tariffs, political divisiveness and global tensions remain. What’s to come in the fourth quarter remains to be seen, but whatever the results might be in the end, the path to that result seems to be quite rocky.   

Legal Update | Opening Doors to Alternative Investment Options in Defined Contribution Plans

On August 7, 2025, an executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors” directed federal agencies to review and revise the regulatory framework that has historically limited access to alternative investments options in defined contribution plans. The executive order articulated a policy that “every American preparing for retirement should have access to funds that include investments in alternative assets when the relevant plan fiduciary determines that such access provides an appropriate opportunity for plan participants and beneficiaries to enhance the net risk-adjusted returns on their retirement assets.”

What are “alternative assets”? The order defines alternative assets as:

• Private market investments, including direct and indirect interests in equity, debt, or other financial instruments that are not traded on public exchanges, including those where the managers of such investments, if applicable, seek to take an active role in the management of such companies
• Direct and indirect interests in real estate, including debt instruments secured by direct or indirect interests in real estate
• Holdings in actively managed investment vehicles that are investing in digital assets
• Direct and indirect investments in commodities
• Direct and indirect interests in projects financing infrastructure development
• Lifetime income investment strategies including longevity risk-sharing pools

When it comes to the decision of including alternative assets in a defined contribution plan investment portfolio, this is a marked shift in direction from the prior administration and in contradiction of the prior guidance provided by the Department of Labor (“DOL”). Historically, the DOL has expressed caution regarding such investments.

In addition to defining what is included in the term alternative assets, the executive order directs that within 180 days of the executive order the Secretary of Labor (“Secretary”):

• Reexamine the DOL's past and present guidance on a fiduciary's duties in connection with making alternative asset investments available in employee benefit plans under ERISA
• Clarify the DOL's position on alternative assets and the appropriate fiduciary process associated with offering asset allocation funds containing investments in alternative assets
• Propose rules, regulations or guidance, potentially including "appropriately calibrated safe harbors"

Not only does this executive order call for a broadening in investment options available to the millions of people invested in defined contribution retirement plans, but there is also mention of the need to promulgate rules and guidance to reduce legal uncertainty regarding plan administrator decisions. The aim being to discourage ERISA litigation tactics that constrain a fiduciary's ability to exercise sound judgment when selecting investment opportunities to plan participants. Historically, in a large part due to the concerns of possible litigation, defined contribution plans have avoided including alternative assets in their portfolio.

In recent years there has been a notable increase in litigation challenging the prudency of fiduciary decisions. A fair amount of the litigation has been able to surpass a motion to dismiss without regard as to whether the plan administrator acted with the applicable standard in making the decision. In an effort to curb this litigation, at least as far as it concerns available investments, the executive order welcomes the Secretary to establish “appropriate calibrated safe harbors.” While the introduction of a safe harbor could be a welcome shift to help some of the concerns regarding litigation, it will not alleviate all participant claims.

It should be noted that the introduction of a safe harbor would not alleviate a plan fiduciary of their duty to act prudently when making decisions on behalf of a plan. Under ERISA, fiduciaries are held to high standards when making decisions regarding plan assets and with the recent changes in deference provided to agencies, merely following regulatory guidance may not be a defense to a breach of fiduciary duty claim. This concern is also heightened by the idea that these alternative investment options inherently open the door to higher risk investments, investment options with notably higher fees, investments with liquidity concerns, and valuation concerns.

One potential strategy to reduce liability regarding these alternative assets would be to include them under the protection already afforded under Section 404(c) of ERISA which allows participants to self-direct the investments of their own funds. Section 404(c) of ERISA allows fiduciaries the avoid liability “for any loss, or by reason of any breach, which results from such participant’s exercise of control. ” However, the option of providing self-directed investment accounts comes with its own laundry list of requirements that must be met.

What happens now? It is clear that the desire of the current administration is to permit alternative investment options in defined contribution plans. The DOL has been called to reevaluate their policy, to clarify their positioning on the availability of alternative investments in defined contribution plans, and design a path toward plans being more inclusive of investment options. In response, the DOL has already rescinded some of their prior guidance which chilled the introduction of alternative investments into defined contribution plans. Additionally, this desire for more direction could open doors for more “safe harbor” like guidance relating to plan fiduciary decisions.

That being said, the executive order has not changed anything yet. There is no requirement that every participant has access to alternative investments. The introduction of alternate investments does not remove the core fiduciary duties under ERISA sections 404 and 408 and plan sponsors must still evaluate whether such assets are appropriate for their participant population and plan structure. Finally, nothing in the executive order calls for the elimination of fiduciary responsibility (i.e., monitoring, disclosure, liquidity management, fee evaluation, valuation controls, etc.).