DOL’s proposed rule on designated investment alternatives
A glimpse into the future for DC plan fiduciaries: A brief summary of the proposed “Fiduciary Duties in Selecting Designated Investment Alternatives”
The Department of Labor (DOL) has released an eagerly awaited proposed regulation, titled “Fiduciary Duties in Selecting Designated Investment Alternatives,” (the “proposal”), which is now open for public comment until June 1. As expected, the proposal takes a principles-based approach to outlining factors for defined contribution (DC) plan fiduciaries to demonstrate they have fulfilled their ERISA duty of prudence in the initial selection of investment options (designated investment alternatives). However, the proposal doesn’t cover fiduciaries’ ongoing responsibility to monitor investment options, which DOL intends to address in future interpretive guidance.
While the proposal seeks to implement President Trump’s August 2025 Executive Order directing DOL (with Treasury and the SEC) to reevaluate barriers to offering alternative assets in DC plans, the proposal’s framework applies to all types of investment options, including those with allocations to alternative assets. We appreciate the proposal is asset neutral, providing general guidance beyond alternative investments contemplated in the executive order. The proposal builds upon the DOL’s 1979 Investment Duties Regulation by identifying six safe-harbor factors for prudent decision-making and providing examples of their application in specific scenarios. In essence, the proposed regulation does not redefine ERISA fiduciary duties, but rather seeks to clarify that ERISA does not restrict any category of investments and refocuses on prudence as a process-based activity that should not be subject to hindsight. Important to note, while the preamble of the proposal states the DOL believes “a fiduciary that can actively demonstrate compliance should be able to confidently rely on it to successfully defend its actions,” the proposal itself does not provide a panacea against DC litigation.
The proposal’s safe harbor could be satisfied by fiduciaries’ appropriate consideration of the following factors based on particular facts and circumstances.
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PerformanceRisk-adjusted expected returns on a net-of-fee basis over an appropriate time horizon compared to a reasonable number of similar investment options
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FeesCompared to a reasonable number of similar investment options, the fee is appropriate for the net-of-fee risk-adjusted expected returns and any other benefits, features, or services offered by the investment option.
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LiquidityAbility to meet the plan’s anticipated liquidity needs at both the plan and participant level, including consideration of any redemption restrictions.
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ValuationAdequate measures are in place to ensure the investment option is timely and accurately valued in alignment with plan needs.
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Performance benchmarksComparison of the investment option’s net-of-fee risk-adjusted expected returns to a “meaningful benchmark” with similar strategies, objectives, and risks. (See Benchmarking Stable Value Strategies and Benchmarking Target Date Strategies for additional guidance)
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Complexity
The investment option’s complexity, including whether the fiduciary has the skills, knowledge, capacity, and experience to comprehend the investment, or needs expert advice.
Fiduciaries could also demonstrate compliance with these factors by working with a professional investment advice fiduciary or delegating responsibility to a professional investment manager.
Fiduciaries cannot yet rely on the proposal, which is the first step in DOL’s effort to develop a final regulation. While the proposal will require careful examination, we have the following initial observations:
- Aligns with current understanding of ERISA prudence. We appreciate the underscoring of the importance of process over hindsight.
- Identifies fees as a factor, but not the only factor. The proposal reiterates that the lowest fee option does not have to be selected but rather the overall value of the option (including but not limited to risk-adjusted returns) should be considered. The proposal discusses broader definitions of value, which will likely be helpful to fiduciaries trying to scope decisions they face.
- Acknowledges time horizon may be long-term in nature, and that there may be varying time horizons at play for a given population.
- Liquidity considerations apply to both the plan and participant level. This may introduce complexity for organizations that are highly acquisitive, experience a high level of other corporate activity or otherwise have significant, reoccurring shifts in their workforce.
- No guidance on how to design an investment menu. The proposal highlights that fiduciaries need to offer a menu that is prudent, but doesn’t provide guidance on what that looks like. We are also curious as to how the DOL’s contemplation of participant demographic factors is reconciled with other documents, like the 2013 Tips for ERISA Plan Fiduciaries, which calls out consideration of participant demographic factors relative to asset allocation investments and glidepaths.
- "Meaningful benchmark" is defined. DOL provides a general definition of a “reasonable benchmark,” signaling the DOL’s view of a benchmark’s significance in evaluating investments. An example is included that in some cases blended benchmarks may be more appropriate for evaluating fund performance. The importance of benchmarks is an issue currently before the Supreme Court in the case, Anderson v. Intel Corp.
- Brokerage windows & managed accounts. Brokerage windows are expressly excluded from the definition of a designated investment alternative, but managed accounts used as a qualified default investment alternative are included.
- Aligns with current understanding of ERISA prudence. We appreciate the underscoring of the importance of process over hindsight.
The proposal has given the DC industry and plan fiduciaries insight into the direction the regulation may take subject to the comment period. However, the proposal should not be taken as final direction for DC plan fiduciaries. Once the regulation is final we will undertake a careful review of the impacts to DC plan fiduciaries and evaluate how current standard practices may evolve as a result of the final regulation. We suggest seeking input from legal counsel, as appropriate, in regard to questions around the proposed regulation.
If you’d like to discuss the findings in this summary or whether alternative investments may be a good fit for your DC plan, please contact us.
Register now for our Q2 DC Quarterly Update on May 6th where we'll discuss the DOL’s approach to fiduciary duties and alternative investments in DC plans, and how the comment period may shape what’s next.
