At a glance: Key takeaways
The US Department of Labor’s Employee Benefits Security Administration (DOL) has proposed a new rule titled “Fiduciary Duties in Selecting Designated Investment Alternatives” that fundamentally reshapes how plan fiduciaries can approach alternative investments in 401(k) and other defined contribution plans (the DOL Proposed Rule). The DOL Proposed Rule establishes a process-based safe harbor framework designed to clarify the application of the Employee Retirement Income Security Act‘s (ERISA) fiduciary duty of prudence under Section 404(a)(1)(B) to the selection of designated investment alternatives (DIAs) within participant-directed individual account plans.
This DOL Proposed Rule is one of the most consequential developments in ERISA fiduciary investment law in decades, and its final form will be shaped in significant part by what happens during the comment period. The stakes for plan sponsors, investment managers, and ultimately retirement savers are substantial.
| Here are the key takeaways: | |
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Asset neutral framework |
The DOL Proposed Rule codifies that ERISA does not require or restrict any specific type of investment alternative, establishing that no asset class, including private equity, private credit, real estate, digital assets, infrastructure, or lifetime income strategies is per se prudent or imprudent. |
| A six-factor process-based safe harbor | Fiduciaries who objectively, thoroughly, and analytically consider six factors — performance, fees, liquidity, valuation, benchmarking, and complexity — receive a presumption of reasonableness entitled to significant deference. The safe harbor operates on a factor-by-factor basis and permits reliance on qualified investment advice fiduciaries or delegation to ERISA Section 3(38) investment managers. Contemporaneous documentation of the fiduciary’s analysis, materials reviewed, advice received, and conclusions for each factor is critical to invoking the safe harbor. The proposed rule emphasizes that a well‑documented process is central to demonstrating prudence and securing deference under ERISA. |
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Not covered by the DOL Proposed Rule |
Compliance with the prudence safe harbor does not excuse fiduciaries from the duty of loyalty under ERISA Section 404(a)(1)(A) or the prohibited transaction rules under Section 406. The DOL Proposed Rule addresses investment selection only; the DOL has deferred the ongoing monitoring obligation to forthcoming interpretive guidance. |
The proposed rule: Core framework
Asset neutrality
The DOL Proposed Rule establishes that ERISA Section 404(a)(1)(B) “does not require or restrict any specific type of designated investment alternative” — plainly neutral to types or classes of investment alternatives, so long as the fiduciary’s selection process adheres to ERISA’s standard of care.
One express limitation applies: investments otherwise illegal under federal law, including investments in foreign adversaries, OFAC-sanctioned entities, and investments violating civil rights laws, are categorically impermissible.
The process-based safe harbor
The DOL Proposed Rule articulates three foundational principles:
- ERISA is fundamentally a law grounded in process
- ERISA gives maximum discretion and flexibility to plan fiduciaries in selecting DIAs
- When fiduciary decision-making follows a prudent process, arbiters should defer to fiduciaries under a presumption of prudence.
The overarching goal is to “alleviate certain regulatory burdens and litigation risk that interfere with the ability of American workers to achieve, through their retirement accounts, the competitive returns and asset diversification necessary to secure a dignified and comfortable retirement.”
The DOL Proposed Rule establishes a safe harbor operative mechanism with six non-exhaustive factors that a fiduciary should “objectively, thoroughly, and analytically consider and make determinations about” when selecting DIAs. When a fiduciary satisfies this standard with respect to any factor, “its judgment regarding the factor or factors is presumed to be reasonable and is entitled to significant deference.”
The safe harbor also permits fiduciaries to satisfy its requirements by relying on recommendations of a prudently selected investment advice fiduciary under ERISA Section 3(21)(A)(ii) or by delegating compliance to an investment manager under ERISA Section 3(38).
The six factors
Performance
The fiduciary must consider a reasonable number of similar alternatives and determine that the DIA’s risk-adjusted expected returns, over an appropriate time horizon and net of fees, further the plan’s purposes. The analysis must address: risks to which investors are exposed (economic, market, sector, investment-specific, and counterparty); participants’ risk capacity; an appropriate time horizon (which may be long-term); and net-of-fees performance. The standard is maximizing returns for a given level of appropriate risk, not selecting the highest-returning strategy.
Fees
The fiduciary must consider similar alternatives and determine that fees are appropriate given risk-adjusted returns and any other value the DIA provides. ERISA is not violated solely because the fiduciary does not select the lowest-fee alternative.
Liquidity
The fiduciary has the discretion to offer designated investment alternatives that include illiquid alternative assets, recognizing that many retirement savers, particularly younger workers with long investment horizons, can benefit from the illiquidity premium these assets often provide. However, this flexibility comes with important obligations: fiduciaries must carefully assess whether a designated investment alternative has sufficient liquidity to meet the anticipated needs of the plan at both the plan and individual participant levels, ensure that any liquidity promises made to participants and beneficiaries can be honored, and evaluate whether redemptions by other plans or investors could adversely impact the liquidity of the investment alternative. Notably, plans are not required to offer fully liquid investment options, but fiduciaries must remain diligent in their liquidity analysis as part of their overall duty of prudence.
Valuation
The fiduciary must determine the DIA has adopted adequate measures for timely and accurate valuation. Notably, a continuation fund using a proprietary valuation methodology that relies on inputs from affiliates of the manager does not satisfy this factor — one of the most significant signals for private markets practitioners. The DOL has expressly requested public comment on whether additional safeguards should be mandated for continuation funds and similar vehicles.
Performance benchmarking
The fiduciary must determine each DIA has a “meaningful benchmark” — defined as an investment, strategy, index, or other comparator with similar mandates, strategies, objectives, and risks. No single benchmark is meaningful for all DIAs on a plan menu.
Complexity
The fiduciary must assess whether it has the skills, knowledge, experience, and capacity to comprehend the DIA sufficiently to discharge its ERISA obligations or must seek qualified assistance from an independent professional advisor. If assistance is needed, the fiduciary must prudently select the professional advisor.
What’s not covered by the proposed rule
The safe harbor operates exclusively within the prudence duty. A fiduciary who follows the safe harbor procedures but selects an investment manager with whom the plan sponsor maintains an undisclosed financial relationship remains fully exposed under Section 404(a)(1)(A) and the prohibited transaction provisions of Section 406.
The DOL Proposed Rule confirms that the duty of prudence applies to the selection and monitoring of DIAs in individual account plans but does not address the monitoring obligation directly. DOL anticipates issuing interpretive guidance in the near term. Fiduciaries must manage this gap through internal policy development in the meantime.
Implications for investment managers
Investment managers seeking to offer alternative products in 401(k) plans bear substantial obligations, including:
- Written representations on liquidity, valuation, risk-considerations and fee structures
- Materials and analyses that are specifically designed to assist plan fiduciaries in satisfying their monitoring and documentation obligations
- Composite benchmark development
Product design must incorporate safe harbor compliance as an affirmative design criterion and not an afterthought.
Comment period: Open issues and how to engage
Comments on the DOL Proposed Rule are due on or before June 1, 2026.
The DOL has solicited comment on several key issues, including fiduciary best practices for portfolio monitoring and menu construction; the continued role of ERISA Section 404(c); whether participant characteristics should be incorporated as an additional safe‑harbor factor; whether monitoring obligations should be addressed in the final rule or through separate guidance; how to design meaningful benchmarks for novel alternative products; and whether the rule adequately addresses risks unique to digital assets.
Whether you need to assess compliance exposure under the six-factor safe harbor framework, structure alternative investment products to satisfy safe harbor requirements, evaluate your plan menu against the asset-neutral principle, or understand how SEC regulatory developments interact with your ERISA obligations, our team is ready to assist.
We strongly encourage market participants to consider submitting comments during the open comment period. Thoughtful, well-constructed comments from affected stakeholders are among the most effective tools available to shape the final contours of a regulatory framework. We are available to assist in drafting and submitting comments, as well as in engaging directly with DOL and SEC staff as needed.