Beyond Alternative Assets: Takeaways of DOL’s Proposed 401(k) Designated Investment Alternative Selection Rule

The US Department of Labor’s proposed rule on Fiduciary Duties in Selecting Designated Investment Alternatives could influence how fiduciaries—and courts—evaluate 401(k) investment options. Although rooted in an executive order on alternative assets, the proposal addresses more than just alternative assets and outlines a new process-based safe harbor for fiduciary decision-making. This LawFlash outlines key themes and implications from the proposal.

As covered in our previous LawFlash titled DOL Proposes Rule on Fiduciary Duties for Selecting 401(k) Plan Investment Options, the Department of Labor (DOL) issued a Proposed Rule in the March 31, 2026 edition of the Federal Register (the Proposed Rule) addressing how fiduciaries evaluate 401(k) investment options. Although rooted in an Executive Order on Democratizing Access to Alternative Assets for 401(k) Investors, the proposal addresses more than just alternative assets and outlines a new process-based safe harbor (the Safe Harbor) for fiduciary decision-making on selecting DC plan investment options. As previously covered, comments on the rule are due on June 1, 2026.

The Proposed Rule’s Safe Harbor sets out a “process based” “non-exhaustive list of factors” that, if “objectively, thoroughly and analytically” considered by a fiduciary, would presume the fiduciary “to have met the duties under Section 404(a)(1)(B) of ERISA of such fiduciary” and be “entitled to significant deference.” The six factors are (1) Performance, (2) Fees, (3) Liquidity, (4) Valuation, (5) Performance Benchmark, and (6) Complexity.

In setting out the six factors, the Proposed Rule also identifies—in the Proposed Rule itself—20 examples (the Examples) that are intended to address specific factual circumstances to assist plan fiduciaries in applying each particular factor.
This LawFlash is intended to draw out several considerations that arise from the Proposed Rule, particularly the 20 detailed Examples in the Proposed Rule.

These considerations highlight that, although the Proposed Rule represents a significant effort by the DOL to provide additional structure and clarity around the application of ERISA’s prudence standard in the context of selecting designated investment alternatives, it raises interesting questions that may warrant further consideration in comments to the DOL, or in implementing compliance with the Safe Harbor (once it is finalized).

EMPHASIS ON INVESTMENT ADVICE FIDUCIARY

A notable aspect of the Examples is the heavy emphasis on the use by plan fiduciaries of a third-party investment advice fiduciary. The DOL describes ERISA’s duty of prudence as requiring appropriate consideration, which “where appropriate” would require “the benefit of analysis of professional advisors like third-party investment advice fiduciaries within the meaning of section 3(21)(A)(ii) of ERISA or “an investment manager as defined in section 3(38) of ERISA.”

Reinforcing this point, 11 of the 20 Safe Harbor Examples reference the use of a 3(21) or 3(38) fiduciary, and in all of those Examples, the fiduciary was deemed to have satisfied the Safe Harbor requirement. In contrast, there are two Examples that specifically identify that a 3(21) or 3(38) fiduciary was NOT used, and in those Examples, the fiduciary was found to not satisfy the Safe Harbor. [1]

While the Proposed Rule does not go so far as to make the use of a third-party adviser a per se requirement (either to demonstrate prudence or to satisfy the Safe Harbor), the overall and repeated reference to investment advisers is notable and shines a favorable light on the benefits of engaging a third-party investment advice fiduciary. While the use of such advisers is common, the DOL has not historically been so direct in emphasizing their use to demonstrate a prudent process. Indeed, as mentioned above, two of the negative examples described scenarios where a plan fiduciary did not obtain third-party advice from a 3(21) or 3(38) fiduciary.

USE OF REPRESENTATIONS

Another notable aspect of the Examples is how often they involve a scenario where the plan fiduciary receives representations from an asset manager or product provider to support its fiduciary decision-making. Five of the Examples involve representations from the manager/product provider—i.e., formal statements or assurances made by the investment manager/product provider about facts concerning an investment product, and in all five of those Examples the fiduciary satisfied the Safe Harbor requirement.

For instance, the Liquidity factor Examples describe representations regarding the fund/product’s liquidity risk management program, and the Valuation factor Examples describe representations regarding the process used to value non-public securities. In all of these representation-based Examples, the DOL describes the fiduciary as having read, critically reviewed, and understood those representations.

In many cases, the DOL’s Examples describe common market practices. That said, these Examples are not in all cases routine or common practices and thus can raise questions such as whether managers will be willing or able to make the representations set forth in several of the Examples.

ADDRESSING LITIGATION RISK

The Proposed Rule (as well as statements the DOL made in announcing the Proposal) reflect the DOL’s clear intent to curb ERISA litigation risks when fiduciaries exercise discretion using a prudent process. In this regard, the Proposed Rule seeks to provide fiduciaries with clearer guideposts in areas where plaintiffs have frequently challenged investment selection and monitoring decisions—especially with respect to performance benchmarking and fee considerations. By embedding these concepts in Examples, the DOL appears to be trying to shape how courts evaluate fiduciary prudence and, in turn, mitigate litigation risk for plan fiduciaries operating within these parameters.

This focus on litigation risk mitigation is reflected not only in the Proposed Rule’s Safe Harbor and Examples, but also in the broader framework of the proposal itself. The DOL repeatedly emphasizes that ERISA is a process-based statute that affords fiduciaries “maximum discretion and flexibility” when making investment decisions, and that fiduciary determinations reached through a prudent process should receive deference from “arbiters of disputes.”

Consistent with that approach, proposed paragraph (e) frames the prudence inquiry around whether fiduciaries give “appropriate consideration of all relevant facts and circumstances,” reinforcing the DOL’s apparent view that fiduciary liability should turn principally on process rather than investment outcomes.

Another indicator of the DOL’s focus on litigation risk mitigation appears in the Example emphasizing that fiduciary prudence does not require selecting the highest-performing investment option. [2]
The Department expressly acknowledges that fiduciaries, particularly when supported by appropriate third-party advice, may reasonably select investments with lower expected returns where doing so aligns with a prudent risk management strategy.

This Example highlights that diversification benefits—such as including alternative assets with low correlations to traditional asset classes—may justify selecting an option that does not in hindsight have the highest returns. This framing directly addresses a common allegation in ERISA litigation that underperformance relative to available alternatives is, by itself, indicative of imprudence.

Another example is that the Proposed Rule clarifies that fiduciary analysis of investment performance may appropriately emphasize long-term results, rather than short-term or recent performance. The Example describes a fiduciary analysis that considers one, three, five, and 10 year performance and that “[a]fter considering the historical performance data for these periods, the named fiduciary adopts the investment advice fiduciary’s recommendation to rely most heavily on the 10-year historical performance data as most probative for purposes of selecting the designated investment alternative.” [3]

The DOL explains that, given the long-term nature of retirement investing, fiduciaries may give greater weight to extended historical performance periods, such as a 10-year look-back. [4]
This Example could be viewed as a counter to litigation theories premised on short-term underperformance, reinforcing that a prudent fiduciary process need not prioritize recent returns over expected long-term outcomes. This Example could then provide fiduciaries with support for investment decisions that may lag benchmarks for periods of time but are still consistent with long-term investment objectives.

In a similar way, the Proposed Rule addresses fee-related litigation risk by clarifying the concept of “value” in the context of the ERISA prudence standard and the proposed fee Safe Harbor. The DOL states that fiduciaries are not always required to select the lowest-cost investment option, and that paying higher fees may be prudent where accompanied by additional services or other benefits. [5]

This clarification is particularly notable given the prevalence of excessive fee litigation, where plaintiffs often focus on the availability of lower-cost alternatives. By emphasizing that cost is only one component of a broader value assessment, the Proposed Rule could be read to reinforce a more holistic evaluation of fees and services in determining fiduciary prudence.

Taken together, these Examples address recurring theories of liability in ERISA litigation that often single out specific data points without taking into account a more holistic picture of the process undertaken.

The Proposed Rule’s Preamble also emphasizes the significant costs associated with defending litigation claims, even at early stages of litigation, suggesting the Proposed Rule could be helpful in defending against such litigation. At the same time, because the Proposed Rule focuses heavily on the substance and documentation of fiduciary process, its practical impact may be more pronounced at later stages of litigation—such as summary judgment or trial—where courts evaluate the evidentiary record, rather than at the motion to dismiss stage, which is typically limited to the sufficiency of the pleadings.

That said, given DOL’s clear intent, we will be tracking how this plays out. Regardless, by articulating these principles in the regulatory text and Preamble, the Proposed Rule may ultimately provide fiduciaries with more concrete defenses grounded in agency guidance, while also shaping how courts assess fiduciary decision-making under ERISA’s prudence standard.

SELECTION, BUT NOT MONITORING? FUNDS, BUT NOT MENUS? PRUDENCE BUT NOT LOYALTY/PTES?

The Safe Harbor and the Examples set out in the Proposed Rule generally only apply to the prudence of the selection of a plan’s designated investment alternatives—not for monitoring the designated investment alternative or for the selection or “curating” of the plan’s entire investment line-up. The absence of a monitoring Safe Harbor is arguably the bigger gap for plan fiduciaries, since ongoing monitoring is where most fiduciary liability exposure arises. Even so, one Example clearly reflects that a material change in the investment strategy, such as to include alternatives, is tantamount to selection of a new investment option. [6] So arguably in at least some respects, as drafted, the Proposed Rule does cover monitoring of changes.

Another similar limitation is that the Safe Harbor, as proposed, would cover the duty of prudence but not the duty of loyalty under ERISA, and equally not ERISA’s prohibited transaction rules. That creates a gap in the coverage of the Safe Harbor, given that it would create a presumption of compliance for only certain of ERISA’s key fiduciary responsibilities.

PROPOSED RULE USE OF PROCESS TERMS: EXISTING STANDARDS?

The Proposed Rule (as well as the Examples) incorporates a number of descriptive terms and phrases used by the DOL to articulate the level of review that the Department views as satisfying ERISA’s duty of prudence when selecting designated investment alternatives. Many of these terms—such as “appropriate consideration” and “relevant factors”—have been used in prior DOL guidance (such as in the 1979 investment duties regulation, now codified at 29 CFR § 2550.404a-1 (1979 Investment Duties Regulation), which the Proposed Rule is intended to supplement).

Nonetheless, the Proposed Rule’s deployment of other phrasings raises interesting questions. In particular, the Department’s references to “objectively, thoroughly, and analytically” and to “critically review”—may invite debate as to whether the Safe Harbor reflects only a clarification of existing standards.

As the preamble explains, the Proposed Rule “supplements and expands on the 1979 Investment Duties Regulation” in the context of selecting designated investment alternatives, while making clear that “[n]othing in today’s proposed regulation is intended to disturb” that regulation. Against that backdrop, the Proposed Rule arguably reinforces continuity in the legal standard while providing more explicit guidance on how fiduciaries can demonstrate compliance in practice.

The chart below summarizes certain of these descriptive terms used in the Proposed Rule, how they function within the Proposed Rule’s framework, how their usage compares to prior Department guidance, and potential implications.

 

Term	Frequency of Use in Proposed Rule	Function in Proposed Rule	Prior Department Guidance and Comparisons/Observations
“Appropriate consideration”	Three (plus, nine references in the Preamble)	The Proposed Rule is primarily framed as an interpretation of the appropriate consideration requirement from the 1979 Investment Duties Regulation, specifically the “appropriate consideration” that prudence requires. In particular, the Proposed Rule states that a fiduciary satisfies prudence by following a prudent process under which it gives “appropriate consideration of all relevant facts and circumstances”. See Fiduciary Duties in Selecting Designated Investment Alternatives, 91 Fed. Reg. 18,245 (proposed Mar. 31, 2026) (to be codified at 29 C.F.R. § 2550.404a-1(e)) (Proposed Paragraph E). The Preamble further elaborates that “appropriate consideration” is a process-based standard requiring evaluation of the facts and circumstances that the fiduciary “knows or should know are relevant,” reinforcing that the inquiry is both contextual and forward-looking.	The “appropriate consideration” term has substantial precedent in Department regulations. For example:   The Preamble expressly ties “appropriate consideration” to the 1979 Investment Duties Regulation, which required fiduciaries to give “appropriate consideration” to relevant facts and circumstances and then “act accordingly.” It further notes that the 1979 regulation explained that “appropriate consideration” includes, but is not limited to, determining whether the investment is reasonably designed to further the purposes of the plan in light of the opportunity for gain and risk of loss. See also Advisory Opinion 81-12A.   Morgan Lewis Insight: For “appropriate consideration,” the historical usage by the DOL and courts is quite stable. For example, in relevant court cases, this standard has been interpreted to recognize that there is a “range of reasonable judgments a fiduciary may make based on her experience and expertise.” Hughes v. Northwestern Univ., 595 U.S. 170, 177 (2022).
“Objectively, thoroughly, and analytically” / “Objective, thorough and analytical”	One (Plus 17 references in the Preamble)	In the Proposed Rule, the phrase is used to describe the expected fiduciary review under the Safe Harbor, specifically that the Safe Harbor requires a fiduciary to “objectively, thoroughly, and analytically consider, and make determinations on, when selecting each such designated investment alternative for the plan investment menu.” The Proposed Rule states that when a fiduciary applies this degree of review to the six factors, it enjoys a presumption—i.e., the Safe Harbor—that fiduciary determinations are reasonable and entitled to deference. See Fiduciary Duties in Selecting Designated Investment Alternatives, 91 Fed. Reg. 18,245 (proposed Mar. 31, 2026) (to be codified at 29 C.F.R. § 2550.404a-1(e)) (Proposed Paragraph F).   The Preamble explains that where a fiduciary has “objectively, thoroughly, and analytically” considered the relevant factors, the fiduciary’s “judgment regarding the factor or factors is presumed to be reasonable and is entitled to significant deference.” [7]	The DOL has used the phrase “objectively, thoroughly, and analytically” in prior Department guidance, most notably in prior guidance on annuity selection and private-equity investments. See, e.g., IB 95-1 / annuity-selection Safe Harbor as reflected in Field Assistance Bulletin 2015-02 and Information Letter 10-23-2014; Information Letter 06-03-2020; Information Letter 12-22-2016. In each instance, the message from the DOL seemed to be that the fiduciary must do more than a surface review and must evaluate the investment in light of plan-specific characteristics, competing alternatives, costs, risks, and operational complexity.   Morgan Lewis Insight: This phrase has a significant pedigree. The DOL used it for annuity-provider searches and later for evaluating lifetime-income default investments and private-equity components in DC plans. The proposal extends this formulation beyond specialized contexts into a broader Safe Harbor applicable to designated investment alternatives generally. Given that these rules are not to disturb the Investment Duties Regulations and given the broad-based focus of the Propose Rules, we question whether focusing more on and referencing “appropriate consideration” would be more helpful.
“Critically review”	Eight (Plus 10 references in the Preamble)	In the Proposed Rule, this phrase appears a number of times, notably in several Examples to describe when fiduciaries seek to rely on third-party materials or representations. The Examples emphasize that fiduciaries may rely on such inputs only if they read and critically review them.   The Preamble reinforces this concept by explaining that fiduciaries may rely on written representations or third-party materials only where they have reviewed them in a manner sufficient to understand their content and implications, and do not have reason to question their accuracy.	There is no clear prior DOL guidance using the exact phrase. In other DOL guidance, fiduciaries are instead instructed not to rely reflexively on ratings or third-party inputs and to obtain enough information to understand the investment and its risks. See, e.g., 29 CFR § 2550.404a-1(b)(1). In the annuity context, the DOL said reliance solely on ratings is insufficient; in the private-equity context, the Department stressed that fiduciaries must understand the investment and evaluate risks, complexity, valuation, liquidity, and fees. See US Dep’t of Labor, Information Letter 06-03-2020 (June 3, 2020)   Morgan Lewis Insight: The fact that the Proposal uses this phrase so many times (18) is of interest, especially when coupled with the Proposed Rule’s frequent reference to use of third-party advisers.

 

CONCLUSION

As set out above, the Proposed Rule provides fiduciaries with a more detailed roadmap for demonstrating prudence in selecting designated investment options but raises questions for consideration and review. Sponsors, fiduciaries, asset managers, and other stakeholders may wish to evaluate how the Proposed Rule aligns with their current practices and consider whether to submit comments addressing these and other issues before the close of the comment period.