DOL’s Proposed Rule on Fiduciary Duties in Selecting Investment Alternatives Portends Enhanced Responsibilities for ERISA Fiduciaries
The Department of Labor’s Employee Benefits Security Administration has issued a proposed regulation clarifying the fiduciary duty of prudence under ERISA Section 404(a)(1)(B) in connection with selecting designated investment alternatives for participant-directed individual account plans.[1] While designed to provide investment fiduciaries with increased flexibilities to consider adding alternative assets to their investment menus, the proposal will also compound the complexity of the investment review process and saddle fiduciaries with increased diligence responsibilities. We encourage ERISA fiduciaries to reach out to qualified ERISA counsel to review their existing procedures in light of the proposal and the proliferation of alternative assets. Key takeaways from the proposal:
Process-Based Safe Harbor. The proposed rule implements President Trump’s 2025 Executive Order, “Democratizing Access to Alternative Assets for 401(k) Investors,” and proposes a process-based “safe harbor” intended to reduce litigation risk and expand fiduciary flexibility in offering alternative asset investments (such as private credit, private equity, or crypto) within a plan’s menu of investment options. The proposal seeks to reduce this litigation risk by identifying six relevant factors that a fiduciary should consider in the context of selecting designated investment alternatives for participant-directed individual account plans, and stating the Department’s view that a plan fiduciary that objectively, thoroughly, and analytically considers, and makes a determination following a described process with respect to those factors should be presumed to have met its duty of prudence under ERISA Section 404(a)(1)(B), and that its judgment should be entitled to “significant deference.”
Increased diligence responsibilities for fiduciaries. Fiduciaries should take care not to view this proposed safe harbor as a “check the box” exercise; if anything, the proposal will result in greater expectations around fiduciary investment processes. For example, while the rule encourages (but does not require) fiduciaries to work with ERISA section 3(21)(A) investment advisors in considering these factors, fiduciaries cannot simply rely on investment advisor recommendations. First, the proposal makes clear that the selection of any investment advisor is a fiduciary act, and that advice must come from “prudently selected investment advisers,” and that the knowledge, skill, and compensation of the investment professional are appropriate for the particular investment alternative under consideration. Further, the fiduciary must be able to document that it objectively, thoroughly, and analytically considered the advice offered, notwithstanding that it may involve complex and unfamiliar asset classes or investment characteristics. Similarly, while the proposal notes that it may be appropriate to use an ERISA section 3(38) investment manager, appointing fiduciaries are responsible for ensuring that the manager is prudently selected and for periodically monitoring the manager to assure that it is handling the plan’s investments in accordance with the appointment.
Six Enumerated Factors. EBSA’s proposal identifies six non-exhaustive factors for fiduciary consideration: (1) performance, (2) fees, (3) liquidity, (4) valuation, (5) performance benchmarking, and (6) the complexity of the designated investment alternative, and provides examples, often in the context of the selection of alternative assets, showing how a good fiduciary process can justify and support the discretionary investment decisions of plan fiduciaries in the context of those identified factors. Under the proposal:
Fiduciaries Should Not Focus Solely on Expected Returns When Considering Performance. Under the proposal, fiduciaries must consider a reasonable number of “similar investment alternatives” and then determine that the risk-adjusted expected returns of the designated investment alternative, over an “appropriate time horizon” and net of anticipated fees and expenses, furthers the purposes of the plan by enabling participants and beneficiaries to maximize risk-adjusted return on investment, net of those fees and expenses. The proposal emphasizes that the evaluation of an investment alternative’s performance should take into account the participants’ likely needs over the course of the anticipated investment, and that an appropriate time horizon for retirement savings may be a long-term horizon due to the long-term nature of retirement savings.
A Fiduciary Can Offer Alternatives with Higher Fees in Some Circumstances. Alternative assets can often involve higher fees than more traditional investments. The proposal makes clear that such higher fee levels would not, on their own, suggest that their inclusion is imprudent. Instead, fiduciaries are required to “objectively, thoroughly, and analytically consider a reasonable number of similar alternatives and determine that the fees and expenses of the designated investment alternative are appropriate, taking into account its risk-adjusted expected returns, net of fees and expenses, and any other value the designated investment alternative brings to furthering the purposes of the plan.”
Fiduciaries Must Carefully Consider Liquidity Needs at Both the Plan and Individual Levels. Alternative asset investments are often less liquid than the publicly traded stock and bond funds that are held by the registered funds commonly available in ERISA plans. However, illiquid investments generally offer an “illiquidity premium” to investors who commit to holding their investment for longer periods of time. Under the proposal, plans do not need to offer fully liquid investment options, but plan fiduciaries must ensure that investments can deliver on any promises of liquidity that are made to participants and beneficiaries. Additionally, plan fiduciaries should also consider the liquidity needs of their plan and whether other plans’ (or other investors’) redemptions might adversely affect the liquidity of the designated investment alternative.
Fiduciaries Must Carefully Evaluate Valuation Methodologies. Alternative assets can present particular challenges with regard to valuation. The proposal provides that fiduciaries must appropriately consider and determine that the designated investment alternative has adopted adequate measures to ensure that the investment alternative is capable of being timely and accurately valued in accordance with the needs of the plan. Among other things, this requires that the fiduciary consider whether valuations are obtained through an independent and conflict-free process, and if conflicts could impact risk-adjusted returns, take appropriate steps to understand and mitigate adverse impacts and make a determination that the conflict of interest will not result in an inaccurate valuation.
Fiduciaries Must Evaluate Each Investment Alternative to a Meaningful Benchmark. Under the proposal, fiduciaries must appropriately consider and determine that each designated investment alternative has a meaningful benchmark and compare the risk-adjusted expected returns, net of fees, of the designated investment alternative to the meaningful benchmark. The proposal provides that a “meaningful benchmark” is “an investment, strategy, index, or other comparator that has similar mandates, strategies, objectives, and risks to the designated investment alternative.”[2]
Fiduciaries Must Consider the Complexity (and Risks) of Investment Alternatives. Under the proposal, plan fiduciaries must appropriately consider the complexity of the designated investment alternative and determine that they possess the skills, knowledge, experience, and capacity to comprehend it sufficiently to discharge their obligations under ERISA and the governing plan documents or whether they must seek assistance from a qualified investment advice fiduciary, investment manager, or other individual. Under the proposal, where a plan fiduciary “reasonably relies” on recommendations of a “prudently selected investment adviser,” that will be “indicative” of a prudent process.
Asset-Neutral Framework. The proposal states that no investment type is inherently favored or disfavored, meaning fiduciaries may consider the full spectrum of asset classes — including private equity, private credit, digital assets, real estate, and commodities, so long as their process is prudent and the investment is not otherwise illegal.
Not Limited to the Consideration of Alternative Assets. Although President Trump’s Executive Order directed the Department to focus guidance on fiduciary responsibilities in connection with investments in alternative assets, EBSA’s proposal would apply to the selection of any designated investment alternative (although much of the exemplary guidance is provided in the context of alternative asset investments). Thus, fiduciaries may be expected to use the new framework across their entire plan menu.
The Proposal Would Apply to the Entire Investment Menu. EBSA’s proposal states that ERISA’s duty of prudence applies not just to the selection of each designated investment alternative but also to the collection of designated investment alternatives as a whole, i.e., to both the individual parts and the sum. These factors may be leveraged to determine whether responsible fiduciaries have prepared a diversified menu of designated investment alternatives that “allows participants with different risk capacities to maximize their returns for a given level of risk.” Fiduciaries may face heightened requirements to demonstrate whether they have adequately considered whether their plan menus would benefit from including alternative assets.
Ongoing Monitoring Obligations Remain Unchanged. Fiduciaries should be aware that the proposed regulation does not address ERISA’s well-established duty for fiduciaries to monitor designated investment options at regular intervals after their selection. Indeed, the proposal notes that the Supreme Court recently affirmed that ERISA fiduciaries have a continuing obligation to monitor all plan investments, to remove options that the fiduciary determines, after a rigorous process, are no longer appropriate, and that offering a broad menu of investment choices does not excuse fiduciaries from breaches if some options are poorly managed.
What’s Next
Regardless of whether the proposal is adopted, investment fiduciaries would be well served in formally incorporating EBSA’s guidance into their existing processes. Given the breadth and complexity of the proposed rule — and its potential to reshape fiduciary expectations across the full range of plan investment decisions — we encourage plan sponsors and fiduciaries to contact us to review their existing investment selection and monitoring processes to ensure they are well-positioned to satisfy the heightened standards contemplated by EBSA’s proposal.
If you have questions about this Client Alert or are interested in additional details or guidance, please reach out to Michael Khalil (michael.khalil@pierferd.com), Jewell Lim Esposito (jewell.esposito@pierferd.com), Sarah Ivy (sarah.ivy@pierferd.com), or your regular PierFerd contact for assistance.
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[1] See Fiduciary Duties in Selecting Designated Investment Alternatives, 91 FR 16088 (March 31, 2026).
[2] The Supreme Court recently granted certiorari in a case alleging that the fiduciaries of two custom target date funds imprudently included in the funds unreasonably large allocations to hedge funds and private equity funds, exposing participants to, among other things, excessive risks, higher and less transparent fees, and significant underperformance compared to traditional investment options. The plaintiff’s suit was dismissed for failing to provide a “meaningful benchmark” against which to compare the Funds, and the Supreme Court is poised to rule on whether such a benchmark is necessary.
