Key Takeaways
- • The DOL's proposed six-factor prudence standard for defined contribution plan fiduciaries requires evaluating investments—including private market assets—against "meaningful benchmarks" with similar mandates, strategies, objectives, and risk profiles, creating a process-based safe harbor for investment selection under ERISA.
- • Benchmarking private assets presents substantial practical challenges due to illiquidity, limited available data, wide performance dispersion, and the absence of agreed-upon comparators, making apples-to-apples comparisons significantly more difficult than public market benchmarking.
- • The proposed rule establishes a regulatory framework to expand private investment allocation in DC plans by requiring fiduciaries to evaluate six factors: performance, fees, liquidity, valuation, complexity, and benchmarking—with the safe harbor contingent on compliance with this multi-factor assessment process.
- • Plan sponsors and fiduciaries face heightened scrutiny in ERISA litigation when benchmarking private assets, as courts have demanded sufficiently comparable investment comparators, raising litigation risk if fiduciaries cannot document rigorous benchmark selection methodology.
- • The DOL's framework aims to democratize private asset access for retirement savers while simultaneously imposing transparency and prudence standards that require fiduciaries to navigate complex valuation and performance measurement challenges inherent to illiquid investments.
Summary
The Department of Labor's proposed investment selection rule introduces a process-based standard for fiduciary prudence in defined contribution plans by requiring fiduciaries to evaluate six factors when selecting investments, including private market assets. The regulation establishes a safe harbor for plan sponsors who systematically assess performance, fees, liquidity, valuation, complexity, and benchmarking before adding investments to plan menus. This framework represents a formal regulatory pathway designed to expand private asset allocation within 401(k) plans, addressing a growing appetite among plan sponsors for alternative investments.
The linchpin of the DOL's proposal—and its central vulnerability—is the requirement that fiduciaries identify a "meaningful benchmark" for each investment and compare its risk-adjusted expected returns net of fees against that comparator. The DOL defines a meaningful benchmark as an investment, strategy, index, or other comparator with similar mandates, strategies, objectives, and risk profiles. However, this requirement becomes substantially more complicated when applied to private market assets. According to Ken Wiles, executive director of the Hick, Muse, Tate & Furst Center for Private Equity Finance at the University of Texas, "Benchmarking is exceptionally difficult with private assets. It's hard with public assets, but even worse with private assets."
Private market investments lack standardized benchmarking infrastructure. These assets exhibit illiquidity, limited transparency, wide performance dispersion across managers, and the absence of agreed-upon industry comparators—conditions that render direct performance comparisons substantially more difficult than public market benchmarking. This structural opacity has already created litigation exposure: ERISA courts have grappled with whether plaintiffs alleging imprudence have identified sufficiently comparable investments, establishing case law that demands rigorous benchmark selection methodology from fiduciaries.
For plan sponsors implementing the DOL's framework, this presents a dual challenge. The safe harbor incentivizes private asset inclusion by clarifying fiduciary responsibilities and establishing a defensible evaluation process. Simultaneously, the benchmarking requirement imposes substantive due diligence obligations that demand fiduciaries document their selection rationale against comparable alternatives—a task complicated by private markets' structural characteristics. The CFA Institute has flagged additional concerns regarding complexity, opaque fee structures, and liquidity challenges that the proposal's safeguards may not adequately address for retirement savers.
The DOL received over 40,000 comments on this proposed regulation from fiduciaries, plan sponsors, and institutional investors, underscoring the significance of this rule for the retirement plan industry. The proposal's ultimate impact will depend on whether fiduciaries can develop defensible benchmarking methodologies for illiquid assets and whether the safe harbor's process-based standard proves sufficient to mitigate both litigation risk and fiduciary liability exposure in practice.
The linchpin of the DOL's proposal—and its central vulnerability—is the requirement that fiduciaries identify a "meaningful benchmark" for each investment and compare its risk-adjusted expected returns net of fees against that comparator. The DOL defines a meaningful benchmark as an investment, strategy, index, or other comparator with similar mandates, strategies, objectives, and risk profiles. However, this requirement becomes substantially more complicated when applied to private market assets. According to Ken Wiles, executive director of the Hick, Muse, Tate & Furst Center for Private Equity Finance at the University of Texas, "Benchmarking is exceptionally difficult with private assets. It's hard with public assets, but even worse with private assets."
Private market investments lack standardized benchmarking infrastructure. These assets exhibit illiquidity, limited transparency, wide performance dispersion across managers, and the absence of agreed-upon industry comparators—conditions that render direct performance comparisons substantially more difficult than public market benchmarking. This structural opacity has already created litigation exposure: ERISA courts have grappled with whether plaintiffs alleging imprudence have identified sufficiently comparable investments, establishing case law that demands rigorous benchmark selection methodology from fiduciaries.
For plan sponsors implementing the DOL's framework, this presents a dual challenge. The safe harbor incentivizes private asset inclusion by clarifying fiduciary responsibilities and establishing a defensible evaluation process. Simultaneously, the benchmarking requirement imposes substantive due diligence obligations that demand fiduciaries document their selection rationale against comparable alternatives—a task complicated by private markets' structural characteristics. The CFA Institute has flagged additional concerns regarding complexity, opaque fee structures, and liquidity challenges that the proposal's safeguards may not adequately address for retirement savers.
The DOL received over 40,000 comments on this proposed regulation from fiduciaries, plan sponsors, and institutional investors, underscoring the significance of this rule for the retirement plan industry. The proposal's ultimate impact will depend on whether fiduciaries can develop defensible benchmarking methodologies for illiquid assets and whether the safe harbor's process-based standard proves sufficient to mitigate both litigation risk and fiduciary liability exposure in practice.
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