As discussed in our prior alert on President Trump’s Executive Order, Democratizing Access to Alternative Assets for 401(k) Investors, the President directed the Department of Labor (“DOL”) to clarify ERISA fiduciary duties and responsibilities when offering alternative investments in participant-directed defined contribution plans. The DOL has now taken a significant step toward implementing that directive with the release of a long-awaited proposed regulation titled Fiduciary Duties in Selecting Designated Investment Alternatives (the “Proposed Rule”).
Prompted by renewed policy interest in private markets and other alternative assets, the Proposed Rule adopts a process-focused, asset-neutral framework that reinforces existing ERISA fiduciary principles rather than endorsing—or discouraging—the inclusion of any particular asset class, including private equity, private credit, real assets, or digital assets.
Overview of the Proposed Rule
The Proposed Rule would amend the DOL’s ERISA fiduciary regulations to clarify how the statutory duty of prudence applies when ERISA fiduciaries select and monitor designated investment alternatives (“DIAs”) in participant-directed defined contribution plans, including 401(k) plans. Importantly, the rule expressly contemplates asset allocation funds—such as target-date funds—that include an allocation to alternative investments.
At its core, the proposal emphasizes that ERISA has always required fiduciaries to focus on process, documentation, and ongoing oversight, regardless of the underlying investment type. The DOL reiterates that ERISA’s fiduciary duties do not depend on labeling an investment as “traditional” or “alternative,” but instead on whether ERISA fiduciaries engage in a prudent process when making the decision.
Proposed Safe Harbor for Designated Investment Alternatives
In general, to satisfy the duty of prudence under ERISA section 404(a) when selecting a DIA, a plan fiduciary must use a prudent process. This process must consider the relevant facts and circumstances that, given the scope of such fiduciary’s investment responsibility or authority, the fiduciary knows or should know are relevant to the particular DIA.
The Proposed Rule establishes a process-based safe harbor for plan fiduciaries when they select a DIA. It identifies a non-exhaustive list of six factors for a plan fiduciary to objectively, thoroughly, and analytically consider when selecting DIAs. When a plan fiduciary follows the process described in the Proposed Rule with respect to any of the six factors, its judgment regarding the factor or factors is presumed to have met its fiduciary duties under section 404(a)(1)(B) of ERISA.
The DOL identified the six factors through thorough consideration of its experience, a comprehensive review of pertinent case law, existing regulations, previous sub-regulatory guidance, EO 14330, and valuable stakeholder input. Each factor’s applicability to a specific DIA varies based on the particular facts and circumstances involved. However, the DOL has indicated that it believes each of the six factors is integral to the vast majority of DIAs that may be offered under a participant-directed defined contribution plan. To evaluate each factor, the fiduciary must appropriately consider a reasonable number of similar investment alternatives.
- Performance: The fiduciary must determine that the risk-adjusted expected returns of the DIA, 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.
- Fees: The fiduciary must determine that the DIA’s fees and expenses are appropriate for its risk-adjusted expected returns, and any other value the alternative brings to furthering the purposes of the plan. For this purpose, “value” includes any benefits, features, or services other than risk-adjusted returns net of fees.
- Liquidity: The fiduciary must appropriately consider and determine that the DIA will have sufficient liquidity to meet the plan’s anticipated needs at both the plan level and individual levels.
- Valuation: The fiduciary must appropriately consider and determine that the DIA has adopted adequate measures to ensure that the DIA is capable of being timely and accurately valued in accordance with the needs of the plan.
- Performance Benchmarks: The fiduciary must appropriately consider and determine that each DIA has a meaningful benchmark and compare the risk-adjusted expected returns, net of fees, of the DIA to the meaningful benchmark. The Proposed Rule defines “meaningful benchmark” for this purpose as “an investment, strategy, index, or other comparator that has similar mandates, strategies, objectives, and risks to the designated investment alternative.” The Proposed Rule also accommodates innovation by making clear that there is no presumption or preference against new or innovative DIA designs, and that when considering a new or innovative product design, a fiduciary should identify the best possible comparators to it while also scrutinizing the potential value proposition presented by the new or innovative design.
- Complexity: The fiduciary must appropriately consider the DIA’s complexity and determine that they have the skills, knowledge, experience, and capacity to comprehend the DIA sufficiently to discharge their obligations under ERISA, or whether they must seek assistance from a qualified investment advice fiduciary, investment manager, or other individual in evaluating the DIA.
Practical Takeaways for Institutional Limited Partners
Although the Proposed Rule is formally directed at ERISA plan fiduciaries, it may have meaningful implications for institutional limited partners (“LPs”), including public and private pension plans, endowments, foundations, insurance companies, sovereign wealth funds and other institutions that invest in alternative assets—particularly where ERISA-governed capital or defined contribution platforms are involved. These implications include:
- Increased Emphasis on Fiduciary‑Grade Documentation. ERISA LPs are likely to demand more robust diligence materials to support their prudent investment process, including clear explanations of risk factors, liquidity management, valuation practices, fee structures, and performance benchmarking. As a result, non-ERISA LPs should consider requesting the same diligence materials received by ERISA LPs, especially any standardized or uniform benchmarking in monitoring the performance of their investments.
- Growing Focus on Defined Contribution Plan‑Compatible Fund Structures. As alternative strategies are evaluated for potential inclusion in asset allocation funds (e.g., target‑date vehicles), LPs may see heightened scrutiny of fund terms that affect liquidity, cash flow predictability, valuation, and operational complexity. These considerations may influence how managers structure new products and manage capacity.
- Side Letters and ERISA‑Specific Terms May Proliferate. To address fiduciary concerns highlighted by the Proposed Rule, ERISA LPs may increasingly seek customized reporting, fee transparency, or governance rights through side letters or separate accounts. On the other hand, non-ERISA LPs may want to ensure their most favored nations rights include rights granted to ERISA LPs to gain visibility in ERISA LPs’ side letters.
- Potential Shifts in Capital Flows. Although the Proposed Rule does not require the inclusion of alternative assets in 401(k) plan DIAs, it may reduce perceived regulatory and litigation barriers to include them. LPs should consider how investment by defined contribution plans could affect fundraising dynamics, allocation availability, secondary markets, and long‑term portfolio construction and whether platform-level relationships can help LPs protect their allocation.
- Constructing Bespoke Relationships. With the influx of ERISA LPs, managers are likely to pivot to platform models that are less accommodating of institutional LPs looking for bespoke relationships. LPs should consider, today, whether they need to lay the groundwork for such arrangements with current long-dated relationships (whether via single managed accounts or otherwise) with their key managers.
- Continued Need to Monitor Regulatory and Litigation Developments. The ultimate impact of the Proposed Rule will depend on its final form and how courts interpret fiduciary obligations in parallel litigation.
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