ERISA & Employee Benefits

The U.S. Department of Labor (DOL) released a proposed regulation that would create a process-based safe harbor for fiduciaries to use when selecting designated investment alternatives for participant-directed plans.[1] The proposal is intended to reduce litigation risk against fiduciaries over their choices of investments for their 401(k) plan investment menus. 

The proposal sets forth a non-exhaustive list of six factors that a plan fiduciary would likely consider when deciding whether to offer an investment directly on a plan’s investment lineup: performance, fees, liquidity, valuation, performance benchmarks, and complexity. The proposal provides a presumption of prudence to fiduciaries if they follow certain processes when evaluating each factor.

The proposal implements President Donald Trump’s August 7, 2025, executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors” (EO 14330), which calls for expanded access to alternative assets in retirement plans. The DOL’s proposal, however, is asset-neutral.[2]

Performance

The proposal states that the fiduciary must appropriately consider a “reasonable number” of similar investment alternatives and must determine that the risk-adjusted expected returns, over the appropriate time horizon and net of anticipated fees and expenses, furthers the purposes of the retirement plan.[3] The focus is not solely on expected returns.[4] When evaluating performance, fiduciaries must also consider factors such as (1) risk (including market, economic, sector, investment-specific, and counterparty risks); (2) the risk capacity of the participant; (3) the time horizon of the plan’s participants and their likely needs over the course of the investment; and (4) anticipated fees and expenses.[5]

Fees

The proposal requires a fiduciary to “objectively, thoroughly, and analytically consider a reasonable number of similar alternatives” when determining that the fees and expenses are appropriate.[6] The fiduciary must consider risk-adjusted expected returns, net of fees and expenses, and any other value (including benefits, features or services) that the designated investment alternative brings to further the purpose of the plan.[7] As has always been true, fiduciaries are not required to select the alternative with the lowest fees and expenses; a fiduciary may choose to pay more in exchange for greater services.[8]

Liquidity

The proposal clarifies that fiduciaries have the discretion to offer designated investment alternatives that contain illiquid investments.[9] While alternative asset investments are often less liquid than publicly traded stocks and bonds, the DOL states that retirement savers with long investment time horizons may benefit from illiquid investments that offer an illiquidity premium.[10] Therefore, a fiduciary must consider the liquidity needs of the plan at both the plan and individual levels.[11] However, fiduciaries must still ensure that investments can deliver on any promises of liquidity made to participants and beneficiaries.[12]

For a registered open-end fund under the Investment Company Act of 1940 (1940 Act), as amended, implementation of a written liquidity risk management program as required by Rule 22e-4 of the 1940 Act would satisfy the liquidity factor. For other investments, a plan fiduciary may meet the liquidity factor by relying on a written representation by the designated investment alternative’s manager that it has implemented a liquidity risk management program “substantially similar” to that required under Rule 22e-4, the fiduciary reviews and understands the written representation, and the fiduciary does not have reason to question the written representation.

Alternatively, a plan fiduciary may conduct a separate analysis to assess whether an investment fund is sufficiently liquid to offer as a designated investment alternative. To meet the liquidity factor, the fiduciary must conclude that the investment appropriately balances future liquidity needs with the ability of the investment to achieve increased risk-adjusted return on investment net of fees, and the ability to maintain its asset allocation targets, even if the investment faces a significant volume of redemption requests.

Valuation

The proposal requires fiduciaries to appropriately consider and determine whether the designated investment alternative has adopted adequate measures to ensure that it is capable of being timely and accurately valued.[13] Fiduciaries may continue to rely on recognized processes such as using public exchanges to determine value of an investment.[14] For securities without a generally recognized market value, a fiduciary must ensure that valuation methodologies are independent, robust and free from conflicts of interest. A fiduciary may rely on a written representation that the securities are valued at least quarterly through an independent, conflict-free process consistent with the Financial Accounting Standards Board Accounting Standards Codification 820.

The safe harbor requirement will be met for 1940 Act-registered funds and business development companies if the plan fiduciary reviews the fund’s audited financial statements and valuation-related prospectus disclosures for compliance with Rule 2a-5 of the 1940 Act; consults with a qualified investment professional, if necessary; and the fiduciary does not know or have reason to know information that would call into question the veracity of the audited financial statements.

Performance Benchmarks

The proposal requires a fiduciary to compare the risk-adjusted expected returns[15] net of fees, of the designated investment alternative to a meaningful benchmark, meaning “an investment, strategy, index, or other comparator that has similar mandates, strategies, objectives, and risks to the designated investment alternative.”[16]

Complexity

The proposal clarifies that fiduciaries may select sophisticated and complex investment strategies.[17] Consistent with longstanding notions, the fiduciary must determine that it has the skills, knowledge, experience and capacity to sufficiently meet its obligations under the Employee Retirement Income Security Act (ERISA) and the governing plan documents or it must seek assistance from a qualified third party.[18] If the fiduciary seeks assistance from a third party, the fiduciary must be prudent in selecting such third party.[19] This means that, for example, a fiduciary who makes available a designated investment alternative with exposure to alternative investments must understand such exposure and its potential value across the other applicable safe-harbor factors.

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