DOL proposes regulation on “Fiduciary Duties in Selecting Designated Investment Alternatives”

On March 24, 2026, the Department of Labor released a proposed regulation “Fiduciary Duties in Selecting Designated Investment Alternatives.” The regulation is in part responsive to President Trump’s Executive Order "Democratizing Access to Alternative Assets for 401(k) Investors.” The proposal, however, does not just apply to alternative assets – instead it proposes a comprehensive set of rules for constructing/monitoring a participant-directed 401(k) plan fund menu.

In this article we review the proposal in detail, beginning with a brief summary of how it works.

Summary

The proposed rule describes ERISA prudence standards that (in DOL’s view) apply to the selection and monitoring of “designated investment alternatives” (DIAs) in a participant-directed DC plan. For this purpose, a DIA is anything in a fund menu other than a brokerage window. So it applies to “core” investment options and the plans default investment (qualified default investment alternative (QDIA)). While the QDIA is typically a target date fund, some plans use a balanced fund or managed account as a QDIA, and if they do, then those funds would also be subject to the (proposed) new rule.

The proposed regulation would provide a comprehensive set of rules for the selection/monitoring of DIAs:

• Only “illegal” investments are per se prohibited. As a general matter, “ERISA does not require or restrict any specific type of designated investment alternative, except insofar as a designated investment alternative might be otherwise illegal [e.g., under the Trading With the Enemy Act].” Thus, there is no per se ERISA prohibition against investing in, e.g., private equity.

• General ERISA prudence standards apply to the selection and monitoring of DIAs. In selecting and monitoring DIAs, the plan fiduciary “has a duty to act prudently … to further the purposes of the plan by enabling participants and beneficiaries … to maximize risk-adjusted returns, net of fees, on investment across their entire portfolios in their plan.” (We note that some sponsors and practitioners may have a problem with the use of the word “maximize” here.)

• The key to compliance is a prudent process. To meet that requirement (“to maximize risk-adjusted returns, etc.), “the plan fiduciary must follow a prudent process under which it gives appropriate consideration, including, where appropriate, with the benefit of analysis of professional advisors like third-party investment advice fiduciaries …, to those facts and circumstances that … are relevant to the particular [DIA].”

• Six factors that add up to a prudent process. The proposal sets forth a “non-exhaustive list” of six factors that the plan fiduciary “must objectively, thoroughly, and analytically consider” in selecting a DIA. Those six factors are:

  • Performance

  • Fees

  • Liquidity

  • Valuation

  • Benchmarking

  • Complexity

• Safe harbor: a fiduciary who adequately considers those six factors is presumed prudent. When a plan fiduciary “objectively, thoroughly, and analytically considers” those six factors, the fiduciary’s judgment is “presumed to have met” ERISA’S prudence standard “and is entitled to significant deference.” To state the obvious, this is not really a “safe harbor” – it is simply DOL’s view of what are best practices plus a (presumably rebuttable) presumption that, when a fiduciary does so, it has complied with ERISA’s fiduciary prudence rule. (We discuss whether courts will adopt DOL’s “safe harbor,” below, after our discussion of the “six factors.”)

The majority of the proposal is devoted to describing, in some detail and with examples, the analytical process a fiduciary should go through with respect to each of the six factors, in different contexts. In what follows, we describe DOL’s proposed standards for fiduciary review of DIAs, factor-by-factor. This material is a little dense, and readers may want to skip issues – such as valuation standards for alternatives – that may not apply to the plan(s) they deal with (e.g., where none of those plans do not include alternatives in the fund menu).

Finally, we note that this is just a proposal, and we expect a lot of comments and (likely) a lot of revision.

Factor 1: Performance

General Rule: The plan fiduciary must appropriately consider a reasonable number of similar alternatives and determine that the risk-adjusted expected returns, over an appropriate time-horizon, of the designated investment alternative, net of anticipated fees and expenses, further[s] the purposes of the plan by enabling participants and beneficiaries to maximize risk-adjusted returns on investment net of fees and expenses.

Example of prudence: consideration of both expected returns and risk. A fiduciary that, with the advice of an expert, after considering risk measures (e.g., Sharpe ratios), “select[s] a target date fund series that has lower expected returns but lower expected risk, as measured by volatility.” The point here is that it isn’t just returns that count as performance, it’s returns relative to risk.

Example of prudence: consideration of participant investment time horizons. A fiduciary of a plan “with a predominantly younger workforce,” with the advice of an expert, “relies most heavily on the 10-year historical performance data (as opposed to 1-, 3-, or 5-year data) as most probative for purposes of selecting the designated investment alternative, because of “the long-term nature of retirement savings.”

Factor 2: Fees

General Rule: The plan fiduciary must 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 and any other value the designated investment alternative brings to furthering the purposes of the plan …, [where] “value” includes any benefits, features, or services other than risk-adjusted returns. … For example, a prudent plan fiduciary could choose to pay more in exchange for greater services.

Example of prudence: customer service as superior value. A fiduciary that, in selecting among five index funds that track the same index, selects “the fund with the highest fees and highest rating for customer service and communication … [where] [t]he difference between the funds with lowest and highest fees is one quarter of one basis point.” Thus, it is okay (in certain circumstances) to pay more for better service.

Example of imprudence: higher fee share class. A fiduciary selects as a DIA a fund’s higher fee share class when a lower fee share class with “identical in terms of shareholder rights and obligations” could have been selected “without any negotiation or additional expenditure of plan assets or resources.”

Example of prudence: higher fee lifetime income product. The sponsor, as settlor, adds a lifetime income benefit to the plan, and the plan fiduciary “selects an asset allocation fund offered through a variable annuity contract to implement the plan sponsor’s decision.” The new DIA (the asset allocation fund) is the same as and has the same expense ratio as a current plan DIA, except the variable annuity DIA “has an additional fee … [that] typically secures more favorable annuity conversion rates throughout the life of the contract than would be available outside of the contract.” The fiduciary consults an expert and then “determin[es], within its discretion, that the [DIA] with the lifetime income benefit provides commensurate value for the fees charged.” Simply making the point that more value (returns plus a lifetime income guarantee) may justify a higher fee.

Example of prudence: alternatives sleeve in TDF resulting in a higher expense ratio and estimated higher risk-adjusted expected returns: The plan fiduciary modifies the plan’s TDF QDIA to include a “specific percentage of hedge funds and private equity funds while reducing the target percentages of publicly traded stocks and bonds,” increasing the fund’s expense ratio and creating the possibility that “the fund might underperform compared to its existing strategy.” The fiduciary consulted an expert “which provided the named fiduciary with a written report that stochastically modeled estimated risk-adjusted returns stemming from the adoption of the modifications and compared the modified target date fund to a reasonable number of similar alternatives.” The fiduciary then determined that the modification of the TDF “furthered the purposes of the plan, including decreasing volatility and reducing the risk of large losses during a market downturn …, [and that] that the higher expense ratio associated with the modification was appropriate in light of the estimated higher risk-adjusted expected returns, net of fees and expenses, over an appropriate horizon.” This is basically an outline of best practice for adding a higher cost alternative sleeve to a TDF that is intended to reduce downside risk. (We note that this issue is before the Supreme Court this term in Anderson, Winston, et al. v. Intel Corp. Inv., et al.)

Example of prudence: best of class passively and actively managed funds. The plan fiduciary, based on expert advice and choosing from three passively managed and three (higher fee) actively managed small cap funds, “selects both the highest performing actively managed fund [and] the passive fund with lowest tracking error and fees.” The “diversification benefits [of including in the fund menu both passive and (higher fee) active small cap funds] justifies the selection of an actively managed fund that charges higher fees than a passive counterpart.” (We should note that some would argue that the quality of active management of a small cap fund could, notwithstanding the higher fees, be its own justification, without any additional rationale that it may “diversify” the participant’s portfolio.)

Factor 3: Liquidity

General Rule: The fiduciary must appropriately consider and determine that the designated investment alternative has adopted adequate measures to ensure that the designated investment alternative is capable of being timely and accurately valued in accordance with the needs of the plan.

This rule applies at both the plan-level and the participant-level.

With respect to participant-level liquidity, the fiduciary should take into account participant liquidity demands via, e.g., “withdrawals due to retirement, separation from service, or financial hardship, asset reallocations … and plan loans.”

Fiduciaries are deemed to meet the participant-level liquidity requirement for DIA’s invested in open-end management investment companies registered under the Investment Company Act of 1940 (which requires adoption of a liquidity risk management program). For, e.g., collective trusts that are not registered under the ’40 Act, the fiduciary is deemed to comply if it obtains, and reviews “a written representation from the person responsible for managing the [DIA] … that the [DIA] has adopted and implemented a liquidity risk management program that is substantially similar to a program that meets the requirements of [the ’40 Act],” and the fiduciary has no reason to question that representation.

Fiduciaries are deemed to meet the plan-level liquidity requirement either: (1) Where the plan fiduciary evaluates the plan’s needs and the investment’s liquidity restrictions and “concludes that the [DIA] will appropriately balance the future liquidity needs of the plan, the ability of the designated investment alternative to achieve increased risk-adjusted return on investment, and the ability to maintain its asset allocation targets even if there were redemptions from multiple plans or non-plan investors.” Or (2) the DIA meets the participant-level liquidity requirements (’40 Act coverage or ’40 Act-like representation) described above.

Example: participant-level liquidity under annuity contract. The fiduciary includes in the plan an annuity contract under which “[a]llocations … become fully committed after 90 days and any immediate withdrawals by a participant before age 65 result in a penalty and a market value adjustment.” The restrictions “enable greater monthly payments at age 65.” Inclusion of this annuity contract in the fund menu would be prudent “if the named fiduciary concluded that the increase in the value of the monthly payments and the certainty of the insurer’s guarantee under the annuity contract justified the restrictions on liquidity.”

Factor 4: Valuation

General Rule: 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.

Example: ’40 Act mutual funds investing in publicly traded securities: Shares in a registered ’40 Act mutual fund, all of the assets of which (except for cash) trade daily on a public, regulated national securities exchange, satisfy this requirement. Where there is no generally recognized market for some of the fund’s securities, “plan fiduciaries may rely on asset valuations that result from the application of reasonable valuation procedures adopted to comply with the [’40 Act] and rules thereunder,” provided the fiduciary has read relevant disclosures and is not aware of any issue.

Example: ASC 820 valuation is generally sufficient. Where assets are not traded on a generally recognized market, valuation through “a conflict-free, independent process no less frequently than quarterly, according to procedures that satisfy the Financial Accounting Standards Board Accounting Standards Codification 820, titled Fair Value Measurements (or any successor standard),” generally satisfies the valuation factor/standard, provided the fiduciary has read relevant disclosures and is not aware of any issue.

Example of imprudence – conflicted valuation. DOL gives as an example of imprudence: a plan fiduciary who accepts a valuation from a fund manager who has an interest in a fund transaction (in the example, a transaction between the DIA and another fund managed or controlled by the DIA manager.

Factor 5: Performance benchmark

The plan fiduciary must appropriately consider and determine that each designated investment alternative has a meaningful benchmark, and compare the risk-adjusted expected returns of the designated investment alternative to the meaningful benchmark. … A “meaningful benchmark” is an investment, strategy, index, or other comparator that has similar mandates, strategies, objectives, and risks to the [DIA]. … [T]here is no presumption or preference against new or innovative [DIA] designs. Instead, when considering a new or innovative product design, a fiduciary should seek to identify the best possible comparators to it while also scrutinizing the potential value proposition presented by the new or innovative design.

Example: benchmark misaligned with fund strategy. DOL gives as an example of a benchmark misaligned with a DIA’s strategy using a large cap index as a benchmark for a TDF.

Example: Custom composite benchmark with a private equity sleeve. DOL gives as an example an asset allocation fund (e.g., a TDF) registered under the ’40 Act that has a private equity “sleeve.” An independent advice fiduciary develops a composite benchmark: “For the publicly traded stock and bond sleeves, the composite benchmark blends the performance of broad-based securities market indices …. For the private equity sleeve, the investment advice fiduciary uses a combination of methodologies commonly used by investment professionals, including the internal rate of return method and a public market equivalent method, and presents these measures with explanations of how to interpret them to monitor the designated investment alternative’s performance over time.” This composite benchmark satisfies the performance benchmark factor/standard.

Example: Prudent custom composite benchmark for public securities. In the example of a TDF that only holds publicly traded securities, DOL views as prudent a “custom composite benchmark [that] is a blend of broad-based securities market indices … represent[ing] the asset allocation used to implement the target date fund’s strategy.” (We should note that some plaintiffs in the BlackRock TDF litigation have challenged the prudence of using a benchmark that simply duplicates the plan’s TDF asset allocation algorithm.)

Factor 6: Complexity

General Rule: The plan fiduciary must appropriately consider the complexity of the designated investment alternative and determine that it [the fiduciary] has the skills, knowledge, experience, and capacity to comprehend it [the DIA] sufficiently to discharge its obligations under ERISA and the governing plan documents or whether it must seek assistance from a qualified investment advice fiduciary, investment manager, or other individual.

Example: private asset fees. With respect to a DIA that includes private assets that “use sophisticated and variable fee-based incentive structures to drive performance, including management fees and performance fees which include carried interest rights,” a fiduciary meets the comprehension requirements (described in the general rule) in either of the two following scenarios:

• “[T]he fiduciary … critically evaluates and determines … (1) that the fee structure will deliver increased value by incentivizing performance which will, in turn, increase expected risk-adjusted return on investment and (2) that this increase outweighs the variability or potential unpredictability of the amount and timing of the fees.” In other words, the fiduciary determines that the private asset returns net of risk are worth the higher fees.

• “[T]he plan will pay an appropriate, flat, AUM-based fee, to the person responsible for managing the designated investment alternative, who will then internalize the underlying fees.”

Example of imprudence: managed account that duplicates (at higher cost) the plan’s TDF. The fiduciary adds a managed account option to the fund menu, but “because the named fiduciary does not understand the design of the managed account service, the named fiduciary provides only the age of each participant to the managed account service, instead of providing, or allowing the participants to provide, information about the participants’ unique financial circumstances. … Based on each participant’s age, the managed account service creates a portfolio for each participant that is materially similar in terms of strategies, historical performance, and liquidity to the portfolio that each participant would have been exposed to in the plan’s target date fund – another designated investment alternative in the plan. The target date fund has substantially lower fees than the managed account service.” This fiduciary has failed the complexity factor/standard.

DOL vs. the courts

There has been litigation, including several Supreme Court decisions, in this area – ERISA fiduciary prudence in participant-directed DC plans – for well-over two decades. Certainly, fees, performance, and benchmarking have generated a lot of precedents over that time, and different courts have taken different positions on the issues DOL is now seeking to (re)define. Indeed, the issue of what is an “appropriate benchmark” (to show alleged underperformance) is before the Supreme Court this term, in a case involving alternatives.

After the Supreme Court’s 2024 decision overruling the Chevron doctrine in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce, et al., it is unclear how much deference the courts will be prepared to give this regulation (if/when it is finalized). DOL argues that this regulation “is entitled to Skidmore deference ... as persuasive authority regarding what constitutes a prudent process.” Skidmore was a 1944 case under the Fair Labor Standards Act in which the Supreme Court held (among other things) that:

We consider that the rulings, interpretations and opinions of the Administrator under this Act [the FLSA], while not controlling upon the courts by reason of their authority, do constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance. The weight of such a judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.

That actually seems fair. And it is possible, after what is likely to be a robust comment process, that the final regulation will be (persuasively) recognized as the “guidebook for prudent 401(k) plan fiduciaries” that it aspires to be.

Finally – does this proposal actually solve DC sponsors’ litigation problem?

Finally, we have to ask whether this rule would achieve its stated goal of “alleviating litigation risk.” As many have observed, with respect to these cases, the “whole ballgame” is getting a plaintiff’s ERISA fiduciary prudence claim thrown out on a motion to dismiss. If that fails, it’s very likely the defendant will settle, to avoid the (generally prohibitive) cost of discovery. Compliance with the six factors/standards in this proposal would seem, generally, to be an issue of fact: e.g., what sort of stochastic analysis was done to prove that a private asset sleeve in a TDF was worth the higher fees? That issue doesn’t look like one that could be resolved on a motion to dismiss.

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We will continue to follow this issue.