Key Takeaways
- • The Department of Labor proposed a process-based safe harbor rule establishing six non-exhaustive factors for plan fiduciaries to evaluate when selecting designated investment alternatives, including risk-adjusted performance, fees and value, liquidity, valuation, meaningful benchmarks, and complexity.
- • The safe harbor applies to all investment selections on a plan investment menu—not just alternative assets—but was prompted by Executive Order 14330 directing the DOL to clarify fiduciary duties regarding alternative investments in 401(k) plans.
- • Fiduciaries whose investment selections follow the proposed regulatory process with respect to any of the six factors receive a presumption that their judgment meets ERISA fiduciary duties of prudence, reducing litigation risk and providing clarity for plan managers.
- • The proposal emphasizes investment neutrality and asset-agnosticity, explicitly avoiding favorable or unfavorable treatment of any investment class and recognizing that fiduciary responsibilities for alternative assets equal those for traditional investments.
- • Fiduciaries may also satisfy compliance by relying on recommendations from 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).
Summary
The Department of Labor released a highly anticipated proposed rule establishing a process-based safe harbor designed to clarify and simplify fiduciary decision-making when selecting designated investment alternatives for 401(k) plans. The proposal directly responds to Executive Order 14330, which tasked the DOL with providing guidance on how plan managers should evaluate alternative assets as components of their investment lineups. The rule marks a significant pivot toward asset-neutrality in regulatory guidance, explicitly avoiding the appearance of favoring or disfavoring any particular investment class.
The centerpiece of the proposal is a six-factor framework that plan fiduciaries should consider when objectively, thoroughly, and analytically evaluating investments: risk-adjusted performance, fees and their value, liquidity, valuation, meaningful benchmarks, and complexity. These factors are presented as non-exhaustive guidance rather than rigid requirements, allowing fiduciaries discretion in application while establishing a structured analytical approach. When plan fiduciaries conduct their evaluation following the process described in the proposed regulation with respect to any of the six factors, their investment judgment receives a presumption of compliance with ERISA fiduciary duties of prudence—a significant legal protection that reduces litigation exposure.
Notably, the safe harbor applies to all investment selections across a plan's investment menu, not exclusively to alternative assets. This universality underscores the DOL's stated commitment to investment neutrality and reflects the principle that fiduciary responsibilities for evaluating alternative investments with unique characteristics—such as lower liquidity or complex valuation methodologies—are substantively identical to those governing traditional asset selection. Jason Levy, head of retirement policy at Great Gray Trust Co., noted that while plan fiduciaries have historically been permitted to select investments with private market exposure if they satisfied ERISA's prudence standard through reasonable processes, the proposal advances the needle by providing specific, actionable guidance on how to evaluate investments with non-traditional characteristics.
The proposed rule also offers alternative compliance pathways. Fiduciaries may satisfy requirements by relying on recommendations from a prudently selected investment advice fiduciary under ERISA Section 3(21)(A)(ii) or by delegating investment selection compliance to an investment manager under ERISA Section 3(38). These provisions accommodate varying plan governance structures and allow delegation of analytical responsibilities where appropriate. The proposal's process-oriented approach ensures consistency with the overall ERISA fiduciary standard while providing meaningful clarity to plan sponsors, advisors, and asset managers navigating the complex landscape of alternative asset integration into retirement plans.
The centerpiece of the proposal is a six-factor framework that plan fiduciaries should consider when objectively, thoroughly, and analytically evaluating investments: risk-adjusted performance, fees and their value, liquidity, valuation, meaningful benchmarks, and complexity. These factors are presented as non-exhaustive guidance rather than rigid requirements, allowing fiduciaries discretion in application while establishing a structured analytical approach. When plan fiduciaries conduct their evaluation following the process described in the proposed regulation with respect to any of the six factors, their investment judgment receives a presumption of compliance with ERISA fiduciary duties of prudence—a significant legal protection that reduces litigation exposure.
Notably, the safe harbor applies to all investment selections across a plan's investment menu, not exclusively to alternative assets. This universality underscores the DOL's stated commitment to investment neutrality and reflects the principle that fiduciary responsibilities for evaluating alternative investments with unique characteristics—such as lower liquidity or complex valuation methodologies—are substantively identical to those governing traditional asset selection. Jason Levy, head of retirement policy at Great Gray Trust Co., noted that while plan fiduciaries have historically been permitted to select investments with private market exposure if they satisfied ERISA's prudence standard through reasonable processes, the proposal advances the needle by providing specific, actionable guidance on how to evaluate investments with non-traditional characteristics.
The proposed rule also offers alternative compliance pathways. Fiduciaries may satisfy requirements by relying on recommendations from a prudently selected investment advice fiduciary under ERISA Section 3(21)(A)(ii) or by delegating investment selection compliance to an investment manager under ERISA Section 3(38). These provisions accommodate varying plan governance structures and allow delegation of analytical responsibilities where appropriate. The proposal's process-oriented approach ensures consistency with the overall ERISA fiduciary standard while providing meaningful clarity to plan sponsors, advisors, and asset managers navigating the complex landscape of alternative asset integration into retirement plans.
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