Key Takeaways
- • The Department of Labor's proposed investment selection rule requires defined contribution plan fiduciaries to evaluate six factors when considering investments—including identifying "meaningful benchmarks" for private market assets—creating a safe harbor for prudent selection decisions under ERISA.
- • Benchmarking private assets remains exceptionally difficult due to illiquidity, limited comparable data, and wide performance dispersion across deals, making apples-to-apples comparisons substantially more challenging than benchmarking public equities or bonds.
- • The DOL defines a "meaningful benchmark" as an investment, strategy, index, or comparator with similar mandates, strategies, objectives, and risks—a standard that courts have already begun scrutinizing in ERISA litigation cases alleging imprudent investment selection.
- • Private market benchmarking has become a central issue in ERISA litigation, where courts must determine whether plaintiffs have identified sufficiently comparable investments to establish breach of fiduciary duty claims.
Summary
The Department of Labor's proposed investment selection rule creates a process-based fiduciary standard that could accelerate private market adoption in defined contribution plans, but the regulatory framework exposes a fundamental challenge: constructing meaningful benchmarks for illiquid, heterogeneous private assets. The rule requires fiduciaries to evaluate six factors—performance, fees, liquidity, valuation, complexity, and benchmarking—when considering plan investments, with private assets now squarely in scope.
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." The difficulty stems from structural characteristics of private markets: illiquidity prevents real-time price discovery, limited publicly available performance data constrains comparative analysis, and wide performance dispersion across individual deals makes statistical aggregation unreliable.
The DOL defines a "meaningful benchmark" as an investment, strategy, index, or other comparator sharing similar mandates, strategies, objectives, and risks. This definition appears straightforward on paper but creates substantial practical challenges in implementation. Unlike public equity indices—where thousands of constituents provide robust statistical foundations—private market benchmarks must be constructed from underlying investment-level data, a process complicated by proprietary information asymmetries and limited peer-set availability.
This benchmarking requirement takes on heightened importance in ERISA litigation, where courts have increasingly grappled with whether plaintiffs alleging imprudence have identified sufficiently comparable alternative investments. The proposed rule's emphasis on meaningful benchmarks will likely intensify this judicial scrutiny, forcing plan sponsors and fiduciaries to document robust benchmarking methodologies or face vulnerability to breach-of-duty claims. As private market exposure grows within retirement plan portfolios, the absence of standardized, widely accepted benchmarking conventions poses both compliance risk and potential liability for fiduciaries navigating the regulatory framework.
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." The difficulty stems from structural characteristics of private markets: illiquidity prevents real-time price discovery, limited publicly available performance data constrains comparative analysis, and wide performance dispersion across individual deals makes statistical aggregation unreliable.
The DOL defines a "meaningful benchmark" as an investment, strategy, index, or other comparator sharing similar mandates, strategies, objectives, and risks. This definition appears straightforward on paper but creates substantial practical challenges in implementation. Unlike public equity indices—where thousands of constituents provide robust statistical foundations—private market benchmarks must be constructed from underlying investment-level data, a process complicated by proprietary information asymmetries and limited peer-set availability.
This benchmarking requirement takes on heightened importance in ERISA litigation, where courts have increasingly grappled with whether plaintiffs alleging imprudence have identified sufficiently comparable alternative investments. The proposed rule's emphasis on meaningful benchmarks will likely intensify this judicial scrutiny, forcing plan sponsors and fiduciaries to document robust benchmarking methodologies or face vulnerability to breach-of-duty claims. As private market exposure grows within retirement plan portfolios, the absence of standardized, widely accepted benchmarking conventions poses both compliance risk and potential liability for fiduciaries navigating the regulatory framework.
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