Fiduciary Duties in Selecting Designated Investment Alternatives

Federal RegisterMar 31, 2026

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AC38

Fiduciary Duties in Selecting Designated Investment Alternatives

AGENCY:

Employee Benefits Security Administration, Department of Labor.

ACTION:

Proposed rule.

SUMMARY:

This document contains a proposed regulation that clarifies, and provides a safe harbor for, a fiduciary's duty of prudence under the Employee Retirement Income Security Act of 1974 (ERISA) in connection with selecting designated investment alternatives for a participant-directed individual account plan, including asset allocation funds that include alternative assets. This proposal implements section 3(c) of President Trump's Executive Order 14330,

Democratizing Access to Alternative Assets for 401(k) Investors.

DATES:

Comments are due on or before June 1, 2026.

ADDRESSES:

You may submit comments, identified by RIN 1210-AC38, by one of the following methods:

•

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

•

Mail or Personal Delivery:

Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC 20210.

Instructions:

All submissions received must include the agency name and Regulation Identifier Number (RIN) for this rulemaking. Comments received, including any personal information provided, will be posted without change to

http://www.regulations.gov

and

http://www.dol.gov/ebsa

, and made available for public inspection at the Public Disclosure Room, N-1513, Employee Benefits Security Administration, 200 Constitution Avenue NW, Washington, DC 20210. Persons submitting comments electronically are encouraged not to submit paper copies. We encourage commenters to include supporting facts, research, and evidence in their comments. When doing so, commenters are encouraged to provide citations to the published materials referenced, including active hyperlinks. Likewise, commenters who reference materials which have not been published are encouraged to upload relevant data collection instruments, data sets, and detailed findings as a part of their comment. Providing such citations and documentation will assist us in analyzing the comments.

Warning:

Do not include any personally identifiable or confidential business information that you do not want publicly disclosed. Comments are public records posted on the internet as received and can be retrieved by most internet search engines.

Docket:

Go to the Federal eRulemaking Portal at

https://www.regulations.gov

for access to the rulemaking docket, including the plain-language summary of the proposed rule of not more than 100 words in length required by the Providing Accountability Through Transparency Act of 2023.

FOR FURTHER INFORMATION CONTACT:

Fred Wong, Office of Regulations and Interpretations, Employee Benefits Security Administration, Department of Labor, at 202-693-8513. This is not a toll-free number.

Customer service information:

Individuals interested in obtaining general information from the Department of Labor concerning Title I of ERISA may call the EBSA Toll-Free Hotline at 1-866-444-EBSA (3272) or visit the Department's website (

www.dol.gov/agencies/

ebsa).

SUPPLEMENTARY INFORMATION:

1. Executive Summary

This document contains a proposed regulation that clarifies, and provides a safe harbor for, a fiduciary's duty of prudence under the Employee Retirement Income Security Act of 1974 (ERISA) in connection with the selection of designated investment alternatives for a participant-directed individual account plan, including asset allocation funds that include investments in alternative assets.

The overarching goal of the proposed regulation is to alleviate certain regulatory burdens and litigation risk that interfere with the ability of American workers to achieve, through their retirement accounts, the competitive returns and asset diversification necessary to secure a dignified and comfortable retirement. This goal can be achieved only by clarifying that ERISA gives fiduciaries (not opportunistic trial lawyers) the discretion and flexibility to determine when designated investment alternatives, including those that contain alternative investments, offer the opportunity for participants to maximize risk-adjusted returns on their retirement assets net of fees.

In support of this overarching goal, three key principles form the bedrock of the proposed regulation. First, there is a need to affirm ERISA as a law grounded in process. Second, ERISA gives maximum discretion and flexibility to plan fiduciaries in selecting designated investment alternatives, including the alternative investments described in Executive Order 14330, titled

Democratizing Access to Alternative Assets for 401(k) Investors.

Third, when ERISA fiduciary decision-making follows a prudent process—such as the process reflected in the proposed regulation—arbiters of disputes should defer to fiduciaries under a presumption of prudence.

E.O. 14330 (Aug. 7, 2025), reprinted in 90 FR 38921 (Aug. 12, 2025).

2. Background

2.1. The Duty of Prudence Under Section 404(a)(1)(B) of ERISA

ERISA's fiduciary responsibilities are in Part 4 of Title I of ERISA. Most pertinent to this rulemaking, ERISA's duty of prudence is found in section 404(a)(1)(B) of ERISA. This section, in relevant part, states: “a fiduciary shall discharge his duties with respect to a plan . . . with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

2.2. 1979 Investment Duties Regulation

Today's proposed regulation is not the first Department regulation to address the application of the duty of prudence to fiduciaries of ERISA-covered plans. In 1979, the Department published a regulation on this topic, titled Investment Duties (hereinafter 1979 Investment Duties Regulation).

29 CFR 2550.404a-1.

The 1979 Investment Duties Regulation, in relevant part, provides that ERISA's duty of prudence is satisfied by a plan fiduciary when selecting an investment if the fiduciary meets two conditions. First, the fiduciary must give “appropriate consideration to those facts and circumstances that, given the scope of such fiduciary's investment duties, the fiduciary knows or should know are relevant to the particular investment . . . including the role the investment or investment course of action plays in that portion of the plan's investment portfolio or menu with respect to which the fiduciary has investment duties.”

And second, the fiduciary must have “acted accordingly.”

29 CFR 2550.404a-1(b)(1)(i).

29 CFR 2550.404a-1(b)(1)(ii).

While the 1979 Investment Duties Regulation does not define “acted accordingly,” it does clarify that “appropriate consideration” shall include, “but is not necessarily limited to” certain factors depending on the type of plan.

That regulation makes clear that the fiduciary of any plan must take “into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment or investment course of action compared to the opportunity for gain (or other return) associated with reasonably available alternatives with similar risks[.]”

In addition, it explains that under certain circumstances the fiduciary also must specifically consider diversification, liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan, and projected return of the portfolio relative to the funding objectives of the plan.

29 CFR 2550.404a-1(b)(2).

Id.

The 1979 Investment Duties Regulation states that the term “appropriate consideration” shall include, “but is not necessarily limited to” a “determination by the fiduciary that the particular investment or investment course of action is reasonably designed, as part of the portfolio (or, where applicable, that portion of the plan portfolio with respect to which the fiduciary has investment duties) or menu, to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment or investment course of action compared to the opportunity for gain (or other return) associated with reasonably available alternatives with similar risks[.]”

Id.

29 CFR 2550.404a-1(b)(2)(ii). In a 2022 rulemaking, in response to commenters' confusion about the application of the term “portfolio,” as used in the 1979 Investment Duties Regulation, to construction of a participant-directed individual account plan's investment menu, the Department agreed that certain factors in paragraph (b) of the 1979 Investment Duties Regulation, such as “the composition of the portfolio with regard to diversification,” do not apply to menu construction for such a plan.

See

87 FR 73822, 73828 (Dec. 1, 2022). In explaining the 1979 Investment Duties Regulation's focus on “portfolio,” the Department noted that the practice followed by some jurisdictions at common law of judging the prudence of an investment alone without regard to the role that the investment plays within the overall investment portfolio would not be improper for evaluating the prudence of an investment or investment course of action under ERISA. 43 FR 17480, 17481 (Apr. 25, 1978).

As explained further below, today's proposed regulation supplements and expands on the 1979 Investment Duties Regulation in the context of selecting designated investment alternatives for participant-directed individual account plans. It does this, first, by identifying six relevant factors, and second, by demonstrating what it means for a fiduciary to “act accordingly”—and therefore to be prudent—in the circumstances addressed in the examples. Nothing in today's proposed regulation is intended to disturb the 1979 Investment Duties Regulation.

The safe harbor with respect to ERISA's prudence requirement in paragraph (b) of the Investment Duties Regulation, as well as the guidance with respect to ERISA's loyalty requirement in paragraph (c) of that Regulation, would not be affected by this proposal. The Department also notes that its most recently published Regulatory Agenda includes a regulatory project related to revision of the 1979 Investment Duties Regulation.

2.3. Relevant Historical Departmental Subregulatory Guidance

On several occasions since the 1979 Investment Duties Regulation, the Department has provided supplementary guidance addressing and identifying appropriate relevant factors with respect to types of investments or investment strategies.

2.3.1. Mortgage Loans to Participants as Investments

In Advisory Opinion 81-12A (Jan. 15, 1981), the Department considered whether a defined benefit plan's fiduciary could offer mortgage loans to plan participants and beneficiaries (a form of plan investment) consistent with its duty of prudence.

The Department recognized that “ERISA's federalized prudence requirement, although based upon the common law of trusts, does depart from traditional trust law in some respects.” The Department stated that it “interprets section 404 as providing

greater flexibility,

in the making of investment decisions by plan fiduciaries, than might have been provided under pre-ERISA common and statutory law in many jurisdictions.”

After discussing the list of factors in the 1979 Investment Duties Regulation, the Department considered several additional specific factors the requester deemed relevant to a fiduciary's consideration of the possible mortgage financing program and agreed that those factors could be appropriately considered by plan fiduciaries in their investment deliberations, along with and in relation to the list of factors in the 1979 Investment Duties Regulation.

U.S. Dep't of Labor, Employee Benefits Security Admin., Advisory Opinion 81-12A (Jan. 15, 1981), available at

https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/1981-12a.pdf.

Id.

at 1 (emphasis added). The existing standard to which ERISA provides greater flexibility was already quite discretionary.

See, e.g.,

Restatement (Second) of Trusts § 187 (1959) (“Where discretion is conferred upon the trustee with respect to the exercise of a power, its exercise is not subject to control by the court, except to prevent an abuse by the trustee of his discretion.”).

2.3.2. Derivatives Contracts as Investments

In an Information Letter to Eugene Ludwig dated March 21, 1996, the Department considered whether a defined benefit plan fiduciary could invest in derivatives, such as futures, options, options on futures, forward contracts, swaps, structured notes and collateralized mortgage obligations, consistent with the duty of prudence.

Speaking to ERISA's neutrality on investments, the letter clarifies that plan fiduciaries are required to engage in the same general procedures and undertake the same type of analysis that they would in making any other investment decision, focusing on factors such as: how the investment fits within the plan's investment policy, what role the particular derivative plays in the plan's portfolio, and the plan's potential exposure to losses.

U.S. Dep't of Labor, Employee Benefits Security Admin., Information Letter to Eugene Ludwig (Mar. 21, 1996), available at

https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/03-21-1996.

Additionally, the Information Letter clarifies that investments in certain derivatives, such as structured notes and collateralized mortgage obligations, may require a higher degree of sophistication and understanding on the part of plan fiduciaries than other investments, and that plan fiduciaries with the authority for investing in derivatives are responsible for securing sufficient information to understand the investment prior to making the investment, including information regarding the associated market risks. Finally, with respect to such investments, the letter clarifies that the duty of prudence requires plan fiduciaries to determine the appropriate methodology to be used for evaluating market risk and the information that must be collected to do so, which, among other things, would include, where appropriate, stress simulation models showing the projected performance of the derivatives and of the plan's portfolio under various market conditions.

2.3.3. Liability Driven Investment Strategy

In Advisory Opinion 2006-08A (Oct. 3, 2006), the Department considered whether a fiduciary of a defined benefit plan may, consistent with the requirements of section 404 of ERISA, consider the liability obligations of the plan and the risks associated with such liability obligations in determining a prudent investment strategy for the

plan.

The plan fiduciary proposed to “risk manage” the assets of defined benefit plans by better matching the risks of a plan's investment portfolio assets with the risks associated with its benefit liabilities, with a goal toward reducing the likelihood that liabilities will rise at a time when the assets decline. The Department concluded that nothing in the statute or the 1979 Investment Duties Regulation limits a plan fiduciary's ability to take into account the risks associated with benefit liabilities or how those risks relate to the portfolio management in designing an investment strategy. In reaching that conclusion, the Department observed that, within the framework of ERISA's prudence, exclusive purpose, and diversification requirements, plan fiduciaries have

broad discretion

in defining investment strategies appropriate to their plans.

U.S. Dep't of Labor, Employee Benefits Security Admin., Advisory Opinion 2006-08A (Oct. 3, 2006), available at

https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2006-08a.

Although Advisory Opinion 2006-08A dealt with defined benefit plans and today's proposed regulation applies to defined contribution plans, which do not have the same sort of benefit liabilities, the controlling concept in the advisory opinion still applies, meaning that a plan fiduciary has broad discretion to consider how to reduce volatility in plan investments when participants are most likely to need their benefits for retirement. Indeed, target date funds, which most defined contribution plans offer,

explicitly attempt to manage volatility as participants near the age when they will need to draw down their money in retirement.

In 2022, EBSA analysis of BrightScope data for audited retirement plans found 91 percent of 401(k) plans offered at least one TDF.

2.3.4. Asset Allocation Fund With Private Equity Component

In an Information Letter to Jon W. Breyfogle, Esq., dated June 3, 2020, the Department considered whether plan fiduciaries of individual account plans could include designated investment alternatives with private equity components in individual account plans consistent with their duty of prudence.

The Department concluded that a fiduciary would not violate its duties under sections 403 and 404 of ERISA solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA-covered individual account plan in the manner described in the letter.

U.S. Dep't of Labor, Employee Benefits Security Admin., Information Letter to Jon W. Breyfogle (June 3, 2020), available at

https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020.

Citing the 1979 Investment Duties Regulation, the Information Letter stated that in evaluating a particular investment alternative for consideration as a designated investment alternative, the fiduciary must engage in an objective, thorough, and analytical process that considers all relevant facts and circumstances and then act accordingly. The letter identified complexity (of both organizational structures and investment strategies), time horizons, performance (risks and benefits) net of fees, fees, valuation, regulatory oversight, diversification, and liquidity as relevant factors. The Department further noted that the plan fiduciary should consider whether it has the skills, knowledge, and experience to make these determinations or whether it needs to seek assistance from a qualified investment adviser or other investment professional to make these determinations.

In so doing, though, the Department was careful not to weigh in on whether “a particular fund or investment alternative” is permitted or forbidden for a plan, because the appropriateness of any given investment option for a particular plan “is an inherently factual question” that depends on numerous “relevant facts and circumstances” that must be considered by a fiduciary through “an objective, thorough, and analytical process.”

On December 21, 2021, the Department issued a supplemental statement on private equity investments which cautioned fiduciaries against selection of a designated investment alternative with a private equity component for a typical 401(k) plan, absent the plan fiduciary having experience evaluating private equity investments for a defined benefit pension plan. The Department subsequently rescinded the supplemental statement on August 12, 2025, because the statement deviated from the Department's historically neutral and principles-based approach to fiduciary investment decisions creating a potentially costly chilling effect on the market.

U.S. Dep't of Labor,

US Department of Labor Rescinds 2021 Supplemental Statement on Alternative Assets in 401(k) Plans

(Aug. 12, 2025),

https://www.dol.gov/newsroom/releases/ebsa/ebsa20250812

(rescinding U.S. Dep't of Labor,

U.S. Department of Labor Supplement Statement on Private Equity in Defined Contribution Plan Designated Investment Alternatives

(Dec. 21, 2021),

www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020-supplemental-statement.

2.3.5. Lifetime Income Product as a Qualified Default Investment Alternative

In Advisory Opinion 2025-04A, the Department considered whether a program, involving investment management services and guaranteed lifetime withdrawal benefits offered through a variable annuity contract, met the requirements to be a “qualified default investment alternative” (QDIA) in an individual account plan. In concluding that the program as described in the opinion satisfied the requirements to be a QDIA under 29 CFR 2550.404c-5(e), the Department noted that whether a plan fiduciary has satisfied the duty of prudence in selecting a lifetime income program, or any other investment alternative, as a QDIA for any particular plan would depend on the facts and circumstances in that particular case.

see also

Letter from Am. Benefits Council to Daniel Aronowitz, Assistant Sec'y of Labor for Employee Benefits (Dec. 5, 2025) (citing Thomas R. Kmak,

Protect Yourself at All Times—Emphasize Quality, Service and Value Before Fees,

Nat'l Inst. of Pension Adm'rs, Apr. 11, 2016);

Cunningham

Cornell Univ.,

604 U.S. 693, 711 (2025) (Alito, J. concurring) (citing CHUBB, Excessive Litigation Over Excessive Plan Fees in 2023 (Apr. 2023)).

The Department is concerned that the prevailing climate of litigation poses significant challenges for plan sponsors and fiduciaries. Indeed, much of this litigation has focused on well-designed plans with prudent processes, with the challenges often ultimately failing, but not before significant resources have been expended in defense.

See, e.g., Mattson

Milliman, Inc.,

No. C22-0037 TSZ, 2024 WL 3024875 (W.D. Wash. June 17, 2024) (disposing of a frivolous case, but only after a bench trial);

Falberg

Goldman Sachs Grp., Inc.,

No. 19 Civ. 9910 (ER), 2022 WL 4280634 (S.D.N.Y. Sept. 14, 2022),

aff'd,

No. 22-2689-CV, 2024 WL 619297 (2d Cir. Feb. 14, 2024) (disposing of a frivolous case, but only after summary judgment).

Consistent with E.O. 14330, stakeholders have indicated that this environment deters employers from establishing, maintaining, or enhancing their retirement plans, stifles the adoption of innovative plan features, and constrains the availability of investment alternatives that could improve participant outcomes, including the kind of exposure to alternative assets contemplated by E.O. 14330 and described in many of the examples in the proposed regulations.

Ultimately, this situation jeopardizes the long-term retirement security of ERISA plan participants.

These cases rarely include any allegations about process but instead often assert conclusory attacks on the outcome of particular fiduciary decisions and ask courts to infer an imprudent process based on circumstantial, outcome-focused allegations. This approach, as discussed above, is not based in the text or law of ERISA. As discussed by the Department in more detail in its recent amicus brief in

Parker-Hannifin Corp.

Johnson,

petition for cert. filed (6th Cir. Jan. 2, 2024) (24-1030), these inferential claims must be subjected to careful, context-sensitive scrutiny with a purported lack of information about the fiduciary process as no excuse from the rigorous requirements of a well-pleaded complaint.

Am. Ret. Ass'n et al.,

supra

note 30; Am. Benefits Council

supra

note 30.

Lawsuits have a “tremendous power to harass” individual fiduciaries,

Cunningham

Cornell Univ.,

2018 WL 1088019, at 1 (S.D.N.Y. Jan. 19, 2018), with courts noting that ERISA fiduciaries often find themselves “between a rock and a hard place,”

Fifth Third Bancorp

Dudenhoeffer,

573 U.S. 409, 424 (2014), or on a “razor's edge,”

Armstrong

LaSalle Bank Nat'l Ass'n,

446 F.3d 728, 733 (7th Cir. 2006), in making reasonable decisions in respect of the investment opportunities they offer to plan participants and beneficiaries.

Paragraph (f) of the proposed regulation, therefore, introduces a process-based safe harbor for plan fiduciaries to use when selecting designated investment alternatives. By referencing paragraphs (g) through (

) of the proposal, paragraph (f) identifies a non-exhaustive list of six factors for a plan fiduciary to objectively, thoroughly, and analytically consider and make determinations about when selecting designated investment alternatives for the plan menu. The six subsequent paragraphs (g) through (

) of the proposal detail each of these six factors.

When a plan fiduciary objectively, thoroughly, and analytically considers, and makes a determination following the described process with respect to, any of the six factors outlined in the paragraphs, its judgment regarding the factor or factors is presumed to be reasonable and is entitled to significant deference. In the Department's view, a plan fiduciary that objectively, thoroughly, and analytically considers and makes a determination regarding any or all of the six factors should be able to confidently rely on that determination without undue fear of litigation, much like how plan fiduciaries can rely on the judicial deference the Supreme Court has acknowledged they can receive in the circumstances addressed in

Firestone Tire & Rubber Co.

Bruch.

See

Firestone Tire & Rubber Co.

Bruch,

489 U.S. 101, 111 (1989), finding in the ERSIA section 502(a)(1)(B) context that “[t]rust principles make a deferential standard of review appropriate when a trustee exercises discretionary powers” (citing

Restatement (Second) of Trusts

§ 187 (Am. Law. Inst. 1959) (“Where discretion is conferred upon the trustee with respect to the exercise of a power, its exercise is not subject to control by the court except to prevent an abuse by the trustee of his discretion.”)).

While each factor is addressed in detail in the subsequent sections of this preamble, the six factors are as follows: performance, fees, liquidity, valuation, benchmarking, and the complexity of the designated investment alternative. The Department has identified these six factors through a thorough consideration of its experience, a comprehensive review of pertinent case law, existing regulations, previous sub-

regulatory guidance, E.O. 14330, and valuable stakeholder input. The applicability of each factor to a specific designated investment alternative will vary based on the particular facts and circumstances involved. Nonetheless, the Department believes that each of these six factors are integral to the vast majority of designated investment alternatives provided within participant-directed individual account plans.

The Department invites public comments on the comprehensiveness and applicability of the six factors outlined herein, particularly in light of best practices within the participant-directed individual account market and established investment principles. Stakeholders are encouraged to identify any additional factors that could enhance the proposed framework, providing rationale for their inclusion. For instance, several stakeholders have proposed that participant profiles or characteristics warrant consideration, particularly in the context of target date funds or managed accounts as designated investment alternatives. Furthermore, the relevance of participant profiles to lifetime income solutions has also been highlighted, again in the context of target date funds. The Department specifically requests input from commenters on whether participant profiles or characteristics should be included in the final rule as a stand-alone factor, and if it should be applied to all designated investment alternatives or just with respect to target date funds and managed accounts.

5. Performance

5.1. The Standard

Proposed paragraph (g) identifies performance as a factor for fiduciary consideration in selecting a designated investment alternative. The paragraph provides that the fiduciary must appropriately consider a reasonable number of similar investment alternatives and then must 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.

As further illustrated by the examples in paragraphs (g)(1) and (g)(2), discussed below, proposed paragraph (g) makes clear that a fiduciary's consideration of an investment alternative's performance should not focus solely on expected returns. When evaluating performance, fiduciaries must take into account the risks that investors are exposed to with respect to the designated investment alternative (including, among other risks, economic, market, sector, and investment-specific risks and counterparty risks), as well as the risk capacity of the plan's participants.

Proposed paragraph (g) also references an appropriate time horizon. Plan fiduciaries must consider the time horizon of the plan's participants when evaluating performance. Depending on the age of the workforce, retirement savings can often involve a long time horizon. Evaluation of an investment alternative's performance should take into account the participants' likely needs over the course of the anticipated investment.

Finally, paragraph (g) provides that the consideration of an investment alternative's performance also should occur net of anticipated fees and expenses. This presents the fiduciary with the most accurate information about the investment's performance.

In all these areas, plan fiduciaries may wish to work with an investment advice fiduciary (within the meaning of ERISA section 3(21)(A)(ii)) to understand and evaluate the performance of the investment.

5.2. Performance Examples

Proposed paragraph (g)(1) provides an example illustrating a fiduciary's consideration of returns. The example describes a named fiduciary that, after considering the risks of the potential investments and the risk capacity of the plan's participants, selects a target date fund series that has lower expected returns, but lower expected risk, as compared to the similar, alternative target date series considered. The lower risk strategy in the example included alternative assets with low correlations to stocks and bonds, which reduced the volatility of returns. In making the selection, the named fiduciary relied on advice from a third-party investment advice fiduciary within the meaning of ERISA section 3(21)(A)(ii). The example in paragraph (g)(1) illustrates the principle that plan fiduciaries need not select an investment strategy with the highest returns nor aim to achieve the highest possible returns but rather should seek to maximize returns for a given level of appropriate risk, consistent with the participants' likely needs over the course of the anticipated investment.

See Anderson

Intel Corp. Inv. Pol'y Comm.,

137 F.4th 1015, 1024 (9th Cir. 2025), cert. granted, No. 25-498 (Jan. 16, 2026) (“ `ERISA fiduciaries are not required to adopt a riskier strategy simply because that strategy may increase returns.' To the contrary, courts have routinely rejected claims that an ERISA fiduciary can violate the duty of prudence by seeking to minimize risk.” (citations omitted)).

Proposed paragraph (g)(2) provides an example of a fiduciary's consideration of time horizon. In this example, a named fiduciary considers three target date fund series and selects a target date fund after considering the past 1-, 3-, 5-, and 10-year historical performance data, but relying most heavily on the 10-year data. In doing so, the named fiduciary relied on advice from a third-party investment advice fiduciary within the meaning of ERISA section 3(21)(A)(ii). The example in paragraph (g)(2) confirms that a plan fiduciary need not select an investment with the highest returns during a short period of time or the most recent period of time. An appropriate time horizon for retirement savings may be a long-term horizon due to the long-term nature of retirement savings.

See Pizarro

Home Depot,

111 F.4th 1165, 1179-80 (11th Cir. 2024) (rejecting a claim of failure to prudently monitor investments, stating, “[a] few here-and-there years of below-median returns, however, are not a meaningful way to evaluate a plan's success as a long-term investment vehicle”).

6. Fees

6.1. The Standard

Paragraph (h) of the proposed regulation identifies fees as a factor for fiduciary consideration in selecting designated investment alternatives. It provides that the fiduciary must 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. For this purpose, the term “value” includes any benefits, features, or services other than risk-adjusted returns net of fees. Proposed paragraph (h) further provides that section 404(a)(1)(B) of ERISA and paragraph (h) of the proposal are not violated solely because the fiduciary does not select the alternative with the lowest fees and expenses from among the reasonable number of alternatives considered. For example, a prudent fiduciary could choose to pay more in exchange for greater services.

Paragraphs (h)(1) through (5) of the proposed regulation set forth five examples applying the factor in proposed paragraph (h) to different fact patterns. While the fees of an investment alternative are to be assessed

in relation to expected risk-adjusted returns, net of fees, and any other value the alternative brings to furthering the purposes of the plan, the fees of an investment alternative are also to be judged against the fees of a reasonable number of similar alternatives. Whether alternatives are similar, and what constitutes a reasonable number of them, are questions of fact and dependent on the specific facts and circumstances of each case. However, as the examples make clear, neither paragraph (h) of the proposed regulation nor ERISA's duty of prudence require a fiduciary to compare an investment alternative with every similar alternative available in the market.

A number of court decisions have indicated that there is no duty to scour the market to find the fund with the lowest fees.

See, e.g., Smith

CommonSpirit Health,

37 F.4th 1160 (6th Cir. 2022),

Forman

TriHealth, Inc.,

40 F.4th 443, 449 (6th Cir. 2012),

Hecker

Deere & Co.,

556 F.3d 575, 586 (7th Cir. 2009).

6.2. Fee Examples

Paragraph (h)(1) of the proposed regulation provides an example demonstrating that a plan fiduciary is not considered imprudent solely because it selected a designated investment alternative with higher fees than other alternatives that have comparable risk-adjusted returns. Consistent with case law, this example illustrates that the duty of prudence does not include a categorical requirement to always select the alternative with the lowest fees even within a group of alternatives with comparable risk-adjusted return. In this example, the plan fiduciary prudently exemplary customer service as the value proposition of the designated investment alternative with higher fees, compared to the other similar alternatives being considered.

Paragraph (h)(2) of the proposed regulation provides an example that does not demonstrate that the plan fiduciary satisfied section 404(a)(1)(B) of ERISA and paragraph (h) of the proposed regulation. In this example, which involves a highly rated registered investment company with multiple share classes, the plan fiduciary fails to consider the differences in fee structures among the various share classes of the fund and ultimately selects a more expensive share class that is identical in all respects to another available share class with lower fees. Nor did the fiduciary in this example enlist the assistance of professional advisor, manager, or consultant before making the selection. The example concludes the lower-cost share class appears to have a superior value proposition, and a prudent selection process ordinarily would have reflected that.

Paragraph (h)(3) of the proposed regulation provides an example reflecting the value proposition that a lifetime income benefit option can bring to furthering the purposes of the plan in question. In this example, the plan fiduciary implements the plan settlor's decision to add a lifetime income benefit option to the plan. To do so, the plan fiduciary selects a new designated investment alternative: an asset allocation fund offered through a variable annuity contract. This designated investment alternative is similar in all material respects—such as risk, return, liquidity, and allocation profile—to another designated investment alternative already on the plan investment menu, except that the existing designated investment alternative does not offer a lifetime income through a variable annuity contract. The two designated investment alternatives have the same expense ratio, but the new designated investment alternative offered through the variable annuity contract has an additional fee associated with the ability of participants to select the lifetime income feature. In this example, the plan fiduciary consults with an investment advice fiduciary, as defined in section 3(21)(A)(ii) of ERISA, who analyzes the annuity market generally, as well as the break-even ages and additional fee of the new designated investment alternative. The plan fiduciary then critically evaluates this analysis and adopts it in determining that the new alternative provides commensurate value for the fees charged. The example concludes that the fiduciary satisfied the consideration and determination requirement of paragraph (h) and section 404(a)(1)(B) of ERISA in deciding that the additional fee under the variable annuity contract is appropriate in relation to the commensurate value it brings in furthering the purposes of the plan.

Paragraph (h)(4) of the proposed regulation provides an example involving a modification to a custom-designed designated investment alternative that is a qualified default investment alternative (target date fund) made for the purpose of risk mitigation—

i.e.,

decreasing volatility and reducing the risk of large losses during a market downturn. The target date fund's existing strategy of targeting specific percentages of publicly traded stocks and bonds would be modified by including investments in specific percentages of hedge funds and private equity funds while reducing the target percentages of publicly traded stocks and bonds. This change would result in an increase in the target date fund's expense ratio. Additionally, under certain market conditions, the fund might underperform compared to its existing strategy, but the change would provide downside protection as added value. The example indicates that because the change in strategy would so clearly implicate the principal objectives of the target date fund, implementing the modification would be tantamount to the selection of a designated investment alternative subject to the proposal.

In this example, the named fiduciary enlisted the services of an investment advice fiduciary, as defined in ERISA section 3(21)(A)(ii), 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 named fiduciary considered and determined, within its discretion, that the modification to the target date fund to include the risk mitigation strategy furthered the purposes of the plan, including decreasing volatility and reducing the risk of large losses during a market downturn.

Furthermore, the named fiduciary considered and determined, within its discretion, 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 for the target date fund. The example concludes that the named fiduciary would satisfy the requirements of proposed paragraph (h) and ERISA section 404(a)(1)(B) with respect to the fees and expenses of the modified target date fund. This is entirely consistent with ERISA's statutory purpose, caselaw, and earlier statements from the Department.

See Anderson

Intel Corporation Inv. Policy Comm.,

137 F.4th 1015, 1024 (9th Cir. 2025), cert. granted, No. 25-498 (Jan. 16, 2026) (noting, in a similar context, that courts have routinely rejected claims that an ERISA fiduciary can violate the duty of prudence by seeking to minimize risk).

See, e.g.,

S. Rep. No. 92-634, at 21 (1972) (Congress prioritized customization, recognizing it as “essential to achieve the basic objectives of private pension plans because of the variety of factors which structure and mold the plans to individual and collective needs of different workers, industries, and locations.”); U.S. Dep't of Labor, Employee Benefits Security Admin.,

Target Date Retirement Funds—Tips for ERISA Plan Fiduciaries

3 (Feb. 2013) (expressly noting that while off-the-shelf, or “pre-packaged,” TDFs are available—often at a very low fee—“custom” TDFs crafted specifically for a particular plan, based on

the specific needs of the plan, and often composed of investment options already in the plan line-up “may offer advantages” that fiduciaries may wish to consider despite the additional “costs and administrative tasks involved” in these types of investments);

Anderson

Intel Corporation Inv. Policy Comm.,

137 F.4th 1015, 1024 (9th Cir. 2025) (noting, consistent with earlier Department positions, “a fiduciary should act as a prudent investment manager following the principles of modern portfolio theory, which recognizes that while the individual riskiness of a particular investment cannot be eliminated, it can be managed through the diversification of investment assets”);

DiFelice

U.S. Airways, Inc.,

497 F.3d 410, 423 (4th Cir. 2007) (“[M]odern portfolio theory has been adopted by the investment community and, for the purposes of ERISA, by the Department of Labor.” (citing 29 CFR 2550.404a-1));

Laborers Nat'l Pension Fund.

N. Trust Quantitative Advisors, Inc.,

173 F.3d 313, 322 (5th Cir. 1999) (“Since 1979, investment managers have been held to the standard of prudence of the modern portfolio theory by the Secretary's regulations.” (citing 29 CFR 2550.404a-1)).

Paragraph (h)(5) of the proposed regulation provides an example involving active management, increased fees, and greater diversification benefits. In this example, a plan fiduciary enlists the services of an investment advice fiduciary to analyze several small-cap funds, half of which are actively managed and the other half passively managed. The passive funds are comparably priced to each other, and the actively managed funds are comparably priced to each other. However, the actively managed funds all charge higher fees than the passive funds. The plan fiduciary selected the best-performing active fund and the best-performing passive fund as designated investment alternatives. This example illustrates that a plan fiduciary may choose to offer both an actively managed and passive fund within a particular strategy to secure diversification benefits for participants across the plan investment menu. In so doing, the fiduciary may prudently conclude that the value of these diversification benefits justifies the selection of an actively managed fund that charges higher fees than a passive counterpart. This example is consistent with several court decisions that involve the offering of both actively managed and passive plan investment alternatives.

See, e.g., Smith

CommonSpirit Health,

37 F. 4th 1160 (6th Cir. 2022);

Davis

Wash. Univ. in St. Louis,

960 F.3d 478 (8th Cir. 2020).

7. Liquidity

7.1. The Standard

Paragraph (i) of the proposed regulation clarifies that a fiduciary must appropriately consider and determine that the designated investment alternative will have sufficient liquidity to meet the anticipated needs of the plan 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 funds that plan fiduciaries often make available to plan participants. Illiquid investments generally offer an illiquidity premium to investors who are willing to hold their investment, for some time, without selling it for cash. Many retirement savers, particularly younger workers, have long investment time horizons until retirement and, therefore, fit the profile of an investor who can benefit from a liquidity premium.

See Barchock

CVS Health Corp.,

No. CV 16-061-ML, 2017 WL 1382517, at *4 (D.R.I. Apr. 18, 2017) (holding that a fiduciary satisfied the duty of prudence in selecting a liquidity level aligned with the plan's investment objectives),

aff'd,

886 F.3d 43 (1st Cir. 2018);

Taylor

United Techs. Corp.,

No. 3:06CV1494, 2009 WL 535779, at *9 (D. Conn. Mar. 3, 2009) (finding that a fiduciary's evaluation and determination of the appropriate level of liquidity for its plan “satisfie[d] the prudent person standard”),

aff'd,

354 F. App'x 525 (2d Cir. 2009).

To achieve the goal of clarifying that ERISA gives fiduciaries the discretion to offer designated investment alternatives that contain illiquid alternative investments, the regulation also provides that plans do not need to offer fully liquid investment options. Nonetheless, plan fiduciaries must ensure that investments can deliver on any promises of liquidity that are made to participants and beneficiaries. 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.

7.2. Liquidity Examples

Paragraph (i)(1) of the proposed regulation contains a positive example of how a plan fiduciary may be deemed to have appropriately considered the participant-level liquidity needs of the plan when selecting a designated investment alternative, including one that holds a portion of illiquid, non-publicly traded securities. The example reflects the reality that some participants contribute to their plan knowing they can take hardship withdrawals or loans because their investments offer daily liquidity. Likewise, the example acknowledges that some plans cover workers with high turnover rates, who, pursuant to the plan terms, often roll their money out of the plan upon separation. The example also posits that when plan terms allow frequent trading, some participants avail themselves of this option. In all these cases, despite the decades they have to save before attaining retirement age, plan participants with long time horizons until retirement may nonetheless expect and need daily liquidity.

The example concludes that one approach available to plan fiduciaries is to obtain a written representation from the person responsible for managing the designated investment alternative regarding the designated investment alternative's liquidity risk management program.

For a designated investment alternative that is a mutual fund registered as an open-end management investment company with the SEC under the Investment Company Act (a “mutual fund”), the example notes that mutual funds are required by rule 22e-4 under the Investment Company Act to adopt and implement a written liquidity risk management program that is reasonably designed to assess and manage their liquidity risk.

For any designated investment alternative not described in the preceding sentence, such as a collective investment trust, the written representation must express that the designated investment alternative has adopted and implemented a liquidity risk management plan that is substantially similar to a program that meets the requirements of such Act. The example also recognizes that a plan fiduciary may otherwise perform appropriate due diligence regarding the designated investment alternative's liquidity risk management program that would satisfy the safe harbor even in the absence of obtaining a written

representation for designated investment alternatives that are not mutual funds. The conclusion in this example depends on the plan fiduciary reading and critically reviewing any written representation (independently or with assistance of a qualified investment professional if necessary) and not knowing (or having reason to know) other information which would cause the fiduciary to question any written representation.

The Department is not prescribing how a fiduciary should evaluate written representations as described in this proposal's examples. The Department believes that important parts of a fiduciary's evaluation under the proposal would include whether the representations are consistent with the terms of the investment alternative's organizational documents and plan's investment agreements, whether those documents or agreements provide a degree of flexibility that effectively cuts back on the matter being represented (

e.g.,

by permitting an investment alternative to suspend investor withdrawal rights established in its organizational documents), and whether the documents or agreements may be amended without the consent of the plan fiduciary. In some instances, a plan fiduciary may need to negotiate a separate agreement to substantiate the matters being represented.

See

15 U.S.C. 80a-15(c); SEC Rule 22e-4, 17 CFR 270.22e-4 (“liquidity risk management programs”), applies to certain investment funds registered with the SEC (generally registered open-end management investment companies) and establishes a regulatory framework intended to reduce the risk that a fund will be unable to meet its redemption obligations and minimize dilution of shareholder interests by promoting stronger and more effective liquidity risk management across funds. It requires funds to establish liquidity risk management programs, which are required to include multiple elements, including: assessment, management, and periodic review of a fund's liquidity risk; classification of the liquidity of fund portfolio investments; determination of a highly liquid investment minimum; limitation on illiquid investments; and board oversight.

In developing this example, the Department understands that participant-level liquidity needs of plans are highly variable, ultimately depending on factors such as the type of plan at issue, its features, and the overall profile of the participants and beneficiaries of the plan as a whole. That variability notwithstanding, the outcome in this example illustrates a deliberative process under which the plan fiduciary assures itself that the designated investment alternative has adopted and implemented a program such that the designated investment alternative is likely to be able to meet the liquidity expectations of the participants and beneficiaries, even in cases when the plan promises participants daily liquidity and the designated investment alternative holds assets it cannot easily sell.

Paragraph (i)(2) of the proposed regulation contains a positive example of how a plan fiduciary may be deemed to have appropriately considered the participant-level liquidity needs of the plan when selecting as a designated investment alternative a guaranteed deferred annuity contract that contains substantial restrictions on liquidity at the participant level. The example illustrates that the mechanics of the annuity in the contract at issue are such that monthly participant contributions purchase increments of deferred income with payments for life beginning when the participant reaches age 65. These monthly contributions are fully committed (

i.e.,

not liquid) after 90 days, and any immediate withdrawals by the participant before age 65 would result in a penalty and a market value adjustment to the value of the annuity that begins at age 65.

This example concludes that the plan fiduciary in question would satisfy the consideration and determination requirements of paragraph (i) of the proposed regulation (

i.e.,

the liquidity factor) if the fiduciary, after an objective, thorough, and analytical investigation, concludes that the increase in the value of the guaranteed monthly payments for the lives of the participants and beneficiaries that select to invest in this designated investment alternative and the certainty of the insurer's guarantee under the contract justify the restrictions on liquidity. Put differently, the example demonstrates that the plan fiduciary in this example must balance the restrictions on liquidity under the annuity contract with the value of the guaranteed monthly payments under the annuity contract, recognizing that such guarantees help plan participants manage investment and longevity risk for the rest of their lives, and determine that the lack of liquidity is justified by a commensurate expected increase in the return on investment or certainty with respect to future payments.

Paragraph (i)(3) of the proposed regulation contains a positive example of how a plan fiduciary may be deemed to have appropriately considered the plan-level liquidity needs of the plan when selecting a designated investment alternative, including one that holds a portion of illiquid, non-publicly traded securities. Just as plan participants may want or need liquidity, retirement plans themselves may need to convert a designated investment alternative's assets into cash without a reduction in value. For example, plans may terminate, merge, or the plan fiduciary may simply decide to liquidate the plan's share in a designated investment alternative if the fiduciary decides to close out the position. Plan-level liquidity considerations also include whether the designated investment alternative manager has the ability to maintain asset allocation targets if other plans (or other investors) demand a redemption.

In traditional pooled investments in publicly traded stocks and bonds, these liquidity needs are typically not hard to meet. Most funds hold securities that can be sold in public markets quickly without lowering the price. In contrast, pooled investments that plan to manage liquidity while also holding sleeves of illiquid assets may impose various kinds of liquidity restrictions (such as requiring advance notice and permitting only incremental redemptions over a period of time) to ensure that they do not stray too far from their asset allocation targets by selling liquid assets to meet redemptions, leaving the funds with an overallocation to illiquid assets relative to the strategy target.

The conclusion in this example illustrates two paths a plan fiduciary may follow to demonstrate that it appropriately considered and determined that the scope and duration of redemption restrictions at the plan level meet the anticipated needs of the plan.

The first path is the same approach discussed in the example in paragraph (i)(1) of the proposed regulation addressing participant-level liquidity needs of the plan. Under this path, a fiduciary may rely on the fact that a mutual fund is required to adopt and implement a written liquidity risk management program that is reasonably designed to assess and manage its liquidity risk under the Act. With respect to designated investment alternatives that are not mutual funds, the plan fiduciary could obtain a written representation that the designated investment alternative has adopted and implemented a liquidity risk management plan substantially similar to a program that meets the requirements of such Act (or otherwise perform appropriate due diligence), provided that the plan fiduciary read, critically reviewed and understood any written representation (independently or with assistance of a qualified investment professional if necessary) and did not know (or have reason to know) other information which would cause the fiduciary to question any written representation.

Under the second path, plan fiduciaries may instead conduct an objective, thorough, and analytical evaluation, on their own or with the help of a third-party investment advice fiduciary, to assess whether a pooled investment is sufficiently liquid to offer as a designated investment alternative. The plan fiduciary should determine the time it would take a designated investment alternative to sell its illiquid investments in the quantity required by the plan's liquidity needs without reducing their value and the liquidity restrictions the investment manager places on the designated investment alternative. The plan fiduciary must conclude that the designated investment alternative appropriately balances future liquidity needs with the ability of the designated investment alternative to achieve increased risk-adjusted return on investment net of fees and the ability to maintain its asset allocation targets even if the fund faces a significant pull on liquidity from redemption requests.

Paragraph (i)(4) of the proposed regulation provides an example that demonstrates a prudent evaluation of liquidity at both the participant and plan level with respect to a pooled investment vehicle that trades liquidity for the ability to diversify into alternative investments to achieve better risk-adjusted returns net of fees. In this example, the plan fiduciary is considering selecting as a designated investment alternative a fund that only permits quarterly redemptions at the

plan level but provides daily liquidity to individual participant investors. This liquidity restriction on the plan provides flexibility for the designated investment alternative's manager, and the fund allocates a portion of its holdings to private assets, some or all of which are illiquid.

The fiduciary obtains representations that the designated investment alternative has adopted and implemented a program that imposes requirements substantially similar to the requirements related to liquidity risk management programs for mutual funds. The timing of the liquidity management is designed to ensure the fund can meet the redemption rights of participating plans while providing plan participants with daily liquidity. Just as in the other examples, the fiduciary reads and critically reviews the written representations, and the fiduciary consults a third-party investment advice fiduciary. The fiduciary also does not know, or have reason to know, other information which would cause the fiduciary to question the written representations. In this case, the fiduciary, after an objective, thorough, and analytical evaluation, determines that the redemption structure of the product is appropriate for the needs of the plan and its participants, and the plan-level liquidity tradeoffs are worth the expected increase in risk-adjusted return net of fees. As the example notes, this analysis may benefit from the assistance of a professional adviser or advisors.

8. Valuation

8.1. The Standard

Paragraph (j) of the proposed regulation identifies valuation as a factor for fiduciary consideration in selecting designated investment alternatives. It provides that 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. For illustrative purposes, paragraph (j) also contains four examples in which plan fiduciaries apply this factor in connection with selecting a designated investment alternative.

8.2. Valuation Examples

Paragraph (j)(1) of the proposed regulation provides an example involving a designated investment alternative that holds investments that trade daily on a public exchange regulated under section 6 of the Securities Exchange Act of 1934, other than cash and cash equivalents. The example clarifies that plan fiduciaries may rely on asset valuations derived from a national securities exchange or another similar, public exchange to the extent the exchange constitutes a generally recognized market through which the value of the investment is readily and accurately determinable in a timely manner. The example concludes that a fiduciary that relies on valuations derived from public exchanges is deemed to have objectively, thoroughly, and analytically determined that the designated investment alternative has adopted adequate measures to ensure that it can be timely and accurately valued in accordance with the needs of the plan.

This example therefore is consistent with the view that investors, including fiduciaries, may rely on public exchanges to determine the value of an investment because those exchanges generally incorporate all publicly available information.

See, e.g., Fifth Third Bancorp.

Dudenhoeffer,

573 U.S. 409, 426-27 (“ERISA fiduciaries . . . may, as a general matter, likewise prudently rely on the market price.”).

See Amgen Inc.

Conn. Ret. Plans & Trust Funds,

568 U.S. 455, 462 (2013) (“[I]t is reasonable to presume that

most

investors—knowing that they have little hope of outperforming the market in the long run based solely on their analysis of publicly available information—will rely on the security's market price as an unbiased assessment of the security's value in light of all public information.” (emphasis added)).

Paragraph (j)(2) of the proposed regulation provides an example involving a designated investment alternative that contains some securities that trade daily on a public exchange (

i.e.,

publicly-traded securities) and some securities for which there is not a generally recognized market (

i.e.,

non-publicly-traded securities). The named fiduciary in this example receives a written representation that the non-public securities are valued no less frequently than quarterly through a conflict-free, independent process according to valuation techniques that satisfy the Financial Accounting Standards Board (FASB) Accounting Standards Codification 820 on Fair Value Measurement.

The fiduciary also receives the current value of each share/unit of or interest in the designated investment alternative in writing. The fiduciary's reliance on this valuation method is considered prudent because the process for determining value was conflict-free, independent, and relies on the application of widely recognized and utilized accounting standards. Consequently, the fiduciary will be determined to have met the consideration and determination requirements of paragraph (j) with respect to the designated investment alternative provided it reads, critically reviews, and understands any written representations and it does not have any information that would cause him to question them.

See, e.g., In re WorldCom, Inc. Sec. Litig.,

352 F. Supp. 2d 472, 478 n.3 (S.D.N.Y. 2005) (finding that the FASB is “the designated organization in the private sector for establishing standards of financial accounting and reporting”).

Importantly, the conclusion of the example in paragraph (j)(2) of the proposed regulation would not change solely because the manager of the investment, acting in good faith, is permitted to adopt alternative valuation procedures if the manager determines and documents a temporary emergency that could result in a negative impact on investors if the generally applicable valuation procedures are followed. The example identifies such a temporary emergency as arising if investors would be able to redeem their interests based on a valuation that the manager believes is inflated and that would result in significant harm to remaining investors.

Paragraph (j)(3) of the proposed regulation provides an example involving a mutual fund that contains some securities that trade daily on a public exchange and some securities for which there is not a generally recognized market. Under the Investment Company Act and rule 2a-5 thereunder, mutual funds are required to have audited financial statements prepared in accordance with generally accepted accounting principles. These audited financial statements include an auditor's report. As part of its process, the plan fiduciary may seek additional assurance by reviewing a fund's publicly available financial statements and valuation-related disclosures to confirm compliance with all applicable requirements under the Investment Company Act related to pricing and valuation of its shares and by reviewing a fund's Form N-1A prospectus disclosures to confirm that a majority of the fund's board is independent (or “non-interested”).

The example concludes that the fiduciary will have met the consideration and determination requirement of paragraph (j) with respect to the designated investment alternative if the fiduciary reviews the mutual fund's publicly

available audited financial statements, and valuation-related disclosures; consults with a qualified investment professional, if necessary; and the fiduciary does not know or have reason to know information which would cause the fiduciary to question the veracity of the audited financial statements. The example illustrates the principle that plan fiduciaries selecting designated investment options governed by the Investment Company Act may rely on asset valuations that result from the application of reasonable valuation procedures adopted to comply with the Act and rule 2a-5 thereunder.

This includes Rules 22c-1 (17 CFR 270.22c-1 (pricing of redeemable securities for distribution, redemption and repurchase)), 2a-4 (17 CFR 270.2a-4 (definition of “current net asset value” for use in computing periodically the current price of redeemable security)), and 2a-5 (17 CFR 270.2a-5 (fair value determination and readily available market quotations)).

Paragraph (j)(4) of the proposed regulation provides an example involving a designated investment alternative that is a continuation fund (Fund) managed or controlled by an entity (Manager) that has recently acquired or contemplates an imminent acquisition of assets from an investment vehicle, such as another fund or vehicle with alternative assets, that is managed or controlled by the Manager or an affiliate of the Manager. Because non-publicly traded assets may be purchased for the Fund from a vehicle controlled by the manager or an affiliated investment vehicle, the potential for the Manager to rely on a conflicted or self-serving valuation is particularly acute, potentially diminishing the risk-adjusted returns offered by the designated investment alternative. And instead of ensuring that valuations are obtained through an independent and conflict-free process, the named fiduciary responsible for the selection of the designated investment alternative agrees that a proprietary valuation methodology relying on inputs provided by affiliates of the Manager may be used. This example reflects a flawed selection process that does not demonstrate that the fiduciary appropriately considered and determined that the designated investment alternative had adopted adequate measures to ensure that the designated investment alternative was capable of being timely and accurately valued in accordance with the needs of the plan. Even where designated investment alternatives do not hold plan assets under ERISA, conflicts of interest can exist. Where those conflicts could impact risk-adjusted return on investment, the duty of prudence generally requires a fiduciary to take appropriate steps to understand and mitigate any such adverse impacts and make a determination that the conflict of interest has not and will not render the designated investment alternative's valuation inaccurate.

The Department invites comment on whether, and if so how, this rulemaking should be modified to include additional safeguards, consistent with the proposal's asset-neutral, process-based framework and E.O. 14330, to address risks that may arise in connection with the valuation and asset selection process of certain private asset vehicles, such as continuation funds. The Department welcomes comment on approaches for addressing such risks in a manner consistent with ERISA's fiduciary standards.

9. Performance Benchmark

9.1. The Standard

Paragraph (k) of the proposed regulation emphasizes the importance of using a meaningful benchmark as a factor when selecting designated investment alternatives. In relevant part, paragraph (k) of the proposal provides that the fiduciary 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. This provision reflects the great weight of authority.

See, e.g., Matney

Barrick Gold,

80 F.4th 1136, 1149 (10th Cir. 2023) (describing the need for “an apples-to-apples comparison”);

Matousek

MidAmerican Energy Co.,

51 F.4th 274, 278 (8th Cir. 2022) (describing the need for a “meaningful benchmark”);

Davis

Wash. Univ. in St. Louis,

960 F.3d 478, 483-85 (8th Cir. 2020) (“[T]o create an inference of a `flawed' process,” however, an investment's underperformance must be measured against a “ `meaningful benchmark . . . . [c]omparing apples and oranges is not a way to show that one is better or worse than the other.' ” (citation omitted)).

Paragraph (k) of the proposed regulation 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 point of this definition is to ensure sufficient likeness between the comparator and the designated investment alternative. Furthermore, it follows from this definition that while there may be more than one meaningful benchmark for a designated investment alternative, no single benchmark is a meaningful benchmark for all designated investment alternatives on a plan investment menu. Paragraph (k) of the proposed regulation incorporates this unassailable principle.

See, e.g., Matney

Barrick Gold,

80 F.4th 1136, 1148 (10th Cir. 2023);

Meiners

Wells Fargo & Co.,

898 F.3d 820, 823 (8th Cir. 2018). The definition in paragraph (k) of the proposed regulation flows from the fact that the federal courts of appeals have recognized that, in evaluating the duty of prudence in the context of comparative performance, “[c]omparing apples and oranges is not a way to show that one is better or worse than the other.”

Davis

Wash. Univ. in Saint Louis,

960 F.3d 478, 485 (8th Cir. 2020). Moreover, the mere fact that an investment is labelled “as `comparable' or `a peer' is insufficient to establish that those [investment options] are meaningful benchmarks.”

Anderson

Intel Corp. Inv. Pol'y Comm.,

137 F.4th 1015, 1023 (9th Cir. 2025). “The need for a relevant comparator with similar objectives—not just a better-performing plan or investment—is implicit in ERISA's text” such that the statute makes the standard of care that of a hypothetical prudent person acting in a “like capacity” in the conduct of an enterprise “of a like character,” and “with like aims.”

Id.

at 1022.

As indicated, paragraph (k) of the proposed regulation requires the plan fiduciary to compare the risk-adjusted expected returns, net of fees, of the designated investment alternative to the meaningful benchmark. For purposes of this comparison, paragraph (k) of the proposed regulation provides that the “risk-adjusted expected returns” of the designated investment alternative may be determined based on its historical performance, unless it has none, in which case it may be determined based on the historical performance of a different investment with similar mandates, strategies, objectives, and risks and that is not the meaningful benchmark.

While a fiduciary should try to identify benchmarks that are as meaningful as possible, there is no presumption or preference against new or innovative designated investment alternative designs. Instead, when considering a new or innovative product design, a fiduciary should simply seek to identify the best possible comparators to it while also assessing the potential value proposition presented by that design.

The Department notes that the standard in proposed paragraph (k)—that a fiduciary 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—is designed to apply to the fiduciary's prudent process in selecting a designated investment alternative. The benchmark that is selected for disclosure to participants for purposes of the Department's participant-disclosure regulation at 29 CFR 2550.404a-5 has a different purpose,

i.e.,

“for participants to use in assessing the various investment options available under their plans[,]” and is governed by the requirements of that regulation.

Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans,

75 FR 64910, 64916 (Oct. 20, 2010).

9.2. Benchmark Examples

Paragraph (k)(1) of the proposed regulation provides an example of a performance benchmark for a designated investment alternative that is a target date fund. The target date fund's strategy and objective involve investing in asset classes that change over time,

with different degrees of risk, gradually becoming more conservative over time. The example concludes that the plan fiduciary's use of a benchmark that is an index that tracks the returns of large capitalization U.S. equities (when a more similar potential benchmark was available) would not establish that the fiduciary satisfied the requirements of paragraph (k) of the proposed regulation. A large capitalization index is not a meaningful comparator because it tracks different securities than the target date fund holds. Furthermore, the large capitalization index only adjusts its constituents over time due to changes in the constituent securities' market capitalizations, rather than based on the years until a particular date, as a target date fund does. This example illustrates the principle that a performance benchmark must be a meaningful comparator by sharing similar traits, including mandates, strategies, objectives, and risks to the designated investment alternative.

Paragraph (k)(2) of the proposed regulation contains an example of a performance benchmark for a designated investment alternative that is an asset allocation fund, and which contains a private equity sleeve, as well as publicly traded stocks and bonds. In the example, a prudently selected investment advice fiduciary within the meaning of ERISA section 3(21)(A)(ii), who has no affiliation with the asset allocation fund, recommended the designated investment alternative after creating a composite benchmark measuring risk-adjusted expected returns, net of fees, of the two sleeves of the designated investment alternative. For the stock and bond sleeves, the composite blends the performance of broad-based securities market indices relative of and in proportion to the stock and bond holdings of the designated investment alternative. For the private equity sleeve, it uses a combination of methodologies commonly used by investment professionals, including the internal rate of return method and a public market equivalent method (presented with explanations of how to interpret them). The investment advice fiduciary in this example also provides the named fiduciary with a written explanation of the composite benchmark, which the named fiduciary reads, critically reviews, and understands.

The plan fiduciary in this example satisfies paragraph (k) of the proposed regulation and ERISA section 404(a)(1)(B) because it objectively, thoroughly, and analytically considered and determined that the designated investment alternative has a meaningful benchmark and then compared the risk-adjusted expected returns, net of fees, of the designated investment alternative to the meaningful benchmark. The composite benchmark reflects the strategies and proportions of the underlying assets of the designated investment alternative. The named fiduciary read, critically reviewed, and understood the investment advice fiduciary's explanation of the composite benchmark. This example illustrates the principle that a named fiduciary, including in the context of the selection of an asset allocation fund which includes a sleeve of alternative assets, may rely on the expertise of an investment advice fiduciary in benchmark construction and analytics, so long as it reads, critically reviews, and understands the investment advice fiduciary's explanation.

Paragraph (k)(3) of the proposed regulation provides a positive example of a named fiduciary using a custom composite benchmark to select as a designated investment alternative a target date fund that holds only publicly traded stocks and bonds. The custom composite benchmark is a blend of broad-based securities market indices, which blend represents the asset allocation used to implement the target date fund's strategy. The named fiduciary reads, critically reviews and understands the benchmark description. The named fiduciary compares the historical performance of the target date fund to the historical returns of the custom composite benchmark as a means of evaluating the risk-adjusted expected returns, net of fees, of the target date fund.

The named fiduciary in this example satisfies the requirements of ERISA section 404(a)(1)(B) and paragraph (k) of the proposed regulation by analytically, thoroughly, and objectively considering and determining within its discretion that the designated investment alternative has a meaningful benchmark which shares similar traits, including mandates, strategies, objectives, and risks, and comparing the risk-adjusted expected returns, net of fees, between the designated investment alternative and the benchmark. This example illustrates the principle that plan fiduciaries may, if appropriate under the circumstances because the fiduciary reviewed and understood the benchmark and because the custom composite shares similar traits with the designated investment alternative, rely on benchmarks that blend multiple broad-based securities market indices to represent the asset allocation used to implement the target date fund's strategy.

10. Complexity

10.1. The Standard

Proposed paragraph (

) addresses the impact of an investment's complexity on a fiduciary's prudent selection of the investment as a designated investment alternative for a plan's participants. It would make clear that plan fiduciaries are not precluded from prudently selecting sophisticated investment strategies that may be complex. In doing so, the paragraph provides that the fiduciary must appropriately consider the complexity of the designated investment alternative and determine that it has the skills, knowledge, experience, and capacity to comprehend it 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. In this regard, the Department has previously stated in the case of complex investments, plan fiduciaries are responsible for securing sufficient information to understand the investment, and its attendant risks, prior to making the investment.

U.S. Dep't of Labor, Employee Benefits Security Admin., Information Letter from Louis J. Campagna to Jon Breyfogle, at n.7 (June 3, 2020) (citing Information Letter from Olena Berg to Eugene A. Ludwig (Mar. 21, 1996) (at

www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/information-letters/03-21-1996

)).

If a plan fiduciary determines to seek assistance in selecting a designated investment alternative, the fiduciary must make a prudent selection of an investment professional. The named fiduciary should consider all the relevant circumstances, including the knowledge, skill, and compensation of the investment professional. Seeking assistance from a professional that is an ERISA fiduciary—such as an investment advice fiduciary as defined in section 3(21)(A)(ii) of ERISA or an investment manager as defined in section 3(38) of ERISA—can provide important benefits to the plan's participants and beneficiaries, as those professionals also must comply with ERISA's fiduciary duties. Moreover, if a named fiduciary appoints an investment manager within the meaning of ERISA section 3(38), the named fiduciary is responsible for the prudent selection of the manager but is not liable for the individual investment decisions of that manager.

However, the named fiduciary must monitor the manager periodically to assure that it is handling the plan's investments in accordance with the appointment.

As noted in proposed paragraph (

), a plan fiduciary must seek assistance from a qualified investment advice fiduciary,

investment manager, or other individual if the plan fiduciary determines that it does not have the skills, knowledge, experience, or capacity to understand an investment sufficiently to discharge its obligations under ERISA and the governing plan documents.

See, e.g., Chesemore

All. Holdings, Inc.,

886 F. Supp. 2d 1007, 1041-42 (W.D. Wis. 2012),

aff'd sub nom. Chesemore

Fenkell,

829 F.3d 803 (7th Cir. 2016) (stating that when fiduciaries “lack the requisite knowledge, experience and expertise to assess the prudence of an investment, the duty of care may require them to hire independent professional advisors”);

Harley

Minn. Mining & Mfg. Co.,

42 F. Supp. 2d 898, 907 (D. Minn. 1999),

aff'd sub nom. Harley

Minn. Min. & Mfg. Co.,

284 F.3d 901 (8th Cir. 2002) (“[(“[I]f ]f a fiduciary lacks the education, experience, or skills to be able to conduct a reasonable, independent investigation and evaluation of the risks and other characteristics of the proposed investment, it must seek independent advice.”);

Liss

Smith,

991 F. Supp. 278, 297 (S.D.N.Y. 1998) (“[(“[W]here ]here the trustees lack the requisite knowledge, experience and expertise to make the necessary decisions with respect to investments, their fiduciary obligations require them to hire independent professional advisors.”). The Department notes that with respect to the other safe harbors proposed herein, to the extent a plan fiduciary reasonably relies on recommendations of a prudently selected investment advice fiduciary within the meaning of section 3(21)(A)(ii) of ERISA, or prudently delegates compliance to an investment manager within the meaning of section 3(38) of ERISA, that fact will be indicative of a prudent process. However, none of the safe harbors require a plan fiduciary to seek assistance from an investment advice fiduciary or investment manager, regardless of whether such assistance is referred to in the factual discussion of the safe harbor. Rather, the standard is whether the fiduciary has the skills, knowledge, experience, or capacity to understand an investment sufficiently to discharge its obligations under ERISA and the governing plan documents.

10.2. Complexity Examples

Proposed paragraph (

)(1) provides an example of complexity in the area of fees. As noted in paragraph (h) of the proposed regulation, the plan fiduciary must determine that the fees and expenses of a designated investment alternative are appropriate, taking into account the designated investment alternative's risk adjusted returns and any other value the designated investment alternative brings to furthering the purposes of the plan. Paragraph (

)(1) addresses the fiduciary's obligation to understand the complex fees that will be charged to the plan.

The example in proposed paragraph (

)(1) describes a pooled investment vehicle that has target positions in private assets which employ variable fee-based incentive structures to drive performance, including management fees and performance fees which include carried interest rights. It then describes two scenarios in which a plan fiduciary is deemed to have met the comprehension requirements. In the first scenario, the plan fiduciary conducts relevant due diligence with respect to understanding the fees and expenses, with the advice of a third-party investment advice fiduciary within the meaning of section 3(21)(A)(ii) of ERISA, if appropriate. After the evaluation, the plan fiduciary concludes that the fee structure will deliver increased value that outweighs the variability and potential unpredictability of the amount and timing of the fees. In the second scenario, the plan fiduciary determines based on written representations from the fund manager that the manager will internalize the underlying fees and the plan will pay only an appropriate, flat fee based on assets under management in the pooled investment product.

Proposed paragraph (

)(2) relates to complexity in the area of participant needs and illustrates an example that would not satisfy paragraph (

) and section 404(a)(1)(B) of ERISA. In the example, the named fiduciary selects as the plan's qualified default investment alternative a managed account service designed to create a customized portfolio targeted to each participant's unique financial circumstances. The named fiduciary, that does not understand the design of the service and does not seek professional advice, provides only the age of each participant to the service and does not provide, or permit participants to provide, additional information about their unique financial circumstances. As a result, the service creates a portfolio for each participant that is materially similar to the portfolio that the participant would obtain through the plan's target date fund, which has substantially lower fees. This example demonstrates a flawed selection process in which the named fiduciary appears to not understand how the designated investment alternative delivered value to the plan and therefore failed to operationalize it accordingly.

11. Designated Investment Alternative Defined

Paragraph (m)(1) of the proposal generally defines the term “designated investment alternative” to mean any investment alternative designated by the plan into which participants and beneficiaries may direct the investment of assets held in, or contributed to, their individual accounts, including a qualified default investment alternative within the meaning of 29 CFR 2550.404c-5. This proposed definition includes qualified default investment alternatives because, even though participants are defaulted into those investments, they have the opportunity to instead direct investment to other plan options. The Department believes this broad definition is appropriate to implement E.O. 14330's directive for guidance with respect to a fiduciary's duties “when deciding whether to make available” particular investments. However, because the Department is of the view that the application of fiduciary principles to investments that a plan participant makes through arrangements such as self-directed brokerage windows may be somewhat different, proposed paragraph (m)(2) makes clear that the term “designated investment alternative” does not include “brokerage windows,” “self-directed brokerage accounts,” or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan.

The definition of “designated investment alternative” in the proposal would extend to managed account services that are qualified default investment alternatives.

In this respect, the term designated investment alternative in the proposal would have broader scope than in the Department's participant-level disclosure regulation at 29 CFR 2550.404a-5, which does not include an investment management service as a designated investment alternative subject to the regulation's investment-related disclosure requirements (although certain other disclosure obligations would apply).

The narrower scope of the definition in the participant-level disclosure regulation relates to the practicality of making the investment-related disclosures with respect to a managed account service, as opposed to a

determination that managed account services should be distinct for all purposes. Given the prevalence of qualified default investment alternatives in participant-directed individual account plans, extending the fiduciary safe harbors in the proposal to all types of qualified default investment alternatives, including managed account services, is particularly important.

See e.g.,

proposed paragraph (

)(2) discussing application of the proposal to a qualified default investment alternative that is a managed account service.

Field Assistance Bulletin No. 2012-02R, Q27,

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2012-02r.

See

29 CFR 2550.404c-5(b)(2) (“Nothing in this section shall relieve a fiduciary from its duties under part 4 of title I of ERISA to prudently select and monitor any qualified default investment alternative under the plan or from any liability that results from a failure to satisfy these duties, including liability for any resulting losses.”).

11.1. Settlor Discussion

Paragraph (m)(3) of the proposed regulation explains that the term “designated investment alternative” does not include plan design features chosen by plan settlors in a nonfiduciary capacity. While, as explained above, the term “designated investment alternative” is defined broadly to include a qualified default investment alternative within the meaning of 29 CFR 2550.404c-5, the Department believes it is important to clarify that the definition does not stretch so broadly as to capture noninvestment features that may be chosen by plan settlors. This is particularly salient for longevity risk-sharing pools which are specifically discussed in E.O. 14330. While it is true that a longevity risk-sharing pool might be implemented or offered in a participant-directed individual account plan through a designated investment alternative, it is also true that a longevity risk-sharing pool might be implemented by a plan sponsor through structural changes to a plan design.

Compare,

for example, a product like CREF's “variable annuity,” which offers longevity risk pooling and could be offered as a designated investment alternative through the prudent process described in the proposed regulation

with

a settlor decision to implement a longevity risk pooling payout feature within the design of a participant-directed individual account plan, separate and apart from any underlying plan investment.

See, e.g., Where Are the Retirement Tontines?,

Larry Pollack, Regulation (Spring 2023) (explaining how CREF's variable annuity product creates open “longevity pools”);

Individual Tontine Accounts,

Richard K. Fullmer & Michael J. Sabin, Journal of Accounting and Finance (Aug. 8, 2018) (describing how longevity risk pooling could be implemented, as a design matter, in an account-based solution, in a way that is wholly agnostic to the underlying investment or designated investment alternative).

12. Regulatory Impact Analysis

The Department has examined the effects of the proposal as required by Executive Order 13563,

Executive Order 12866,

the Paperwork Reduction Act of 1995,

the Regulatory Flexibility Act,

section 202 of the Unfunded Mandates Reform Act,

Executive Order 13132,

and Executive Order 14192.

76 FR 3821 (Jan. 21, 2011).

58 FR 51735 (Oct. 4, 1993).

44 U.S.C. 3506(c)(2)(A) (1995).

Public Law 96-354, 94 Stat. 1164 (1980).

Public Law 104-4, 109 Stat. 48 (1995).

64 FR 43255 (Aug. 9, 1999).

90 FR 9065 (Feb. 6, 2025).

12.1. Executive Orders

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives. If regulation is necessary, agencies must select a regulatory approach that maximizes net benefits, including potential economic, environmental, public health, and safety effects; distributive impacts; and equity. Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility.

Under Executive Order 12866, “significant” regulatory actions are subject to review by the Office of Management and Budget (OMB). Section 3(f) of Executive Order 12866 defines a “significant regulatory action” as any regulatory action that is likely to result in a rule that may:

(1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, territorial, or tribal governments or communities (also referred to as “economically significant”);

(2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;

(3) Materially alter the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or

(4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order.

This proposal seeks to clarify the relevant factors and determinations that fiduciaries should consider when selecting designated investment alternatives for participant-directed individual account plans under section 404(a)(1)(B). OMB has determined that this proposal is significant within the meaning of Section 3(f)(1) of Executive Order 12866. The Department has provided an assessment of the proposal's potential costs, benefits, and transfers associated with this proposed rule.

Executive Order 14192,

Unleashing Prosperity Through Deregulation,

was issued on January 31, 2025. Section 3(a) of Executive Order 14192 requires an agency, unless prohibited by law, to identify at least ten existing regulations to be repealed when the agency issues a new regulation. In furtherance of this requirement, section 3(c) of Executive Order 14192 requires that the new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with prior regulations. A significant regulatory action (as defined in section 3(f) of Executive Order 12866) that would impose total costs less than zero is considered an Executive Order 14192 deregulatory action. This proposed rule, if finalized as proposed, is, therefore, expected to be an Executive Order 14192 deregulatory action. The proposed rule offers plan sponsors more confidence in exercising their choice in provision of designated investment alternatives for the plan, and results in significant time and cost savings for plans.

The Department, as directed by Executive Order 14192, estimates that the perpetual time horizon present value costs would be −$8,155.2 million in 2024 dollars with annualized costs of −$570.9 million.

12.2. Need for Regulatory Action

On August 7, 2025, the President issued Executive Order 14330,

Democratizing Access to Alternative Assets for 401(k) Investors.

This Executive Order requires the Department to:

90 FR 38921 (Aug. 12, 2025).

(1) Reexamine its guidance on what a fiduciary's duties are under ERISA when considering whether to offer an asset allocation fund with exposure to alternative assets to defined contribution plan participants; and

(2) Clarify its position on alternative assets and what the appropriate fiduciary process would be for a fiduciary to offer asset allocation funds with exposure to alternative assets to defined contribution plan participants.

To this end, Executive Order 14330 urges the Department to propose rules, regulations, or guidance, as appropriate, to clarify the duties that such a fiduciary owes to plan participants and beneficiaries when considering offering an investment fund with exposure to alternative assets. In particular, these clarifications identify the criteria fiduciaries should use to prudently balance potentially higher expenses against the objectives of seeking greater

long-term net returns and broader diversification of investments.

Executive Order 14330 defines alternative assets to include private market investments, direct and indirect interests in real estate, holdings in actively managed investment vehicles investing in digital assets, direct and indirect investments in commodities, direct and indirect interests in projects financing infrastructure development, and lifetime income strategies. This proposed rule, however, is not limited solely to the conditions that must be met for a fiduciary to offer an asset allocation fund with exposure to alternative assets to defined contribution plan participants and beneficiaries. Rather, it clarifies more broadly that section 404(a)(1)(B) of ERISA does not require or restrict any specific type of designated investment alternative, except insofar as a designated investment alternative might be otherwise illegal, provided the fiduciary with responsibility or authority to select designated investment alternatives follows a prudent process when establishing a menu to enable participants and beneficiaries in such plans to help improve risk-adjusted returns on investment.

In addition, Executive Order 14330 directs the Department to “prioritize actions that may curb ERISA litigation that constrains fiduciaries' ability to apply their best judgment in offering investment opportunities to relevant plan participants.” Fiduciaries generally adopt a process-driven approach when selecting designated investment alternatives. This process, however, can vary significantly across plans because of the lack of regulatory clarity, with this variation exposing plans to litigation risk when plaintiffs argue that fiduciaries should have selected something else. As a result, when asked, some plans indicated that they opted not to offer services or investment options that other plans did not offer, fearing that atypical offerings would put them at risk of litigation.

Courtney Zinter, Am. Benefits Council,

American Benefits Council Survey Finds: The Proliferating Risk of Baseless Retirement Plan Litigation is Harming Plan Participants and Retirement Security

(Oct. 2, 2025),

https://www.americanbenefitscouncil.org/pub/?id=80095a3f-cbb8-e46c-854f-a475d2c68358.

By issuing this proposed rule and clarifying the steps fiduciaries should consider taking when making these determinations, as well as providing a safe harbor for fiduciaries fulfilling these requirements, the Department will enable responsible plan fiduciaries to consider and exercise their duties with respect to the selection of any investment when making plan investment menu selections.

12.2.1. Clarifying the Standard for Selection of Designated Investment Alternatives

In recent years, plaintiffs have increasingly pursued legal action related to the alleged imprudent selection of fund options, investment styles, or account structures, and the imprudent selection of service providers and negotiation of fee arrangements. These claims are typically evaluated based on whether the fiduciary engaged in a thorough, independent investigation of the kind that other prudent fiduciaries would have engaged in under similar circumstances.

In their review, courts have held that prudence is evaluated “prospectively, based on the methods the fiduciaries employed, rather than retrospectively, based on the results they achieved,”

and that “a fiduciary need not take a particular investment course to meet the prudent person standard.”

But court decisions have been inconsistent, with courts often allowing cases to proceed to discovery, which causes plans to spend millions in defense and creates settlement leverage for plaintiffs.

Vahick A. Yedgarian & Ram Paudel,

Quantitative Analysis of Damages in ERISA Fiduciary Breach Litigation,

Fin. & Inv. Plan. Educator eJournal 1 (Sept. 9, 2025),

https://dx.doi.org/10.2139/ssrn.5461234.

Brief for Encore Fiduciary as Amicus Curiae

at 2,

Parker-Hannifin Corp.

Johnson,

No. 24-1030 (U.S. May 21, 2025).

Jenner & Block,

Practice Series: ERISA Litigation Handbook

334 (2021),

https://www.jenner.com/a/web/tq6i81QxHmqcsmUPMXCWp5/4k1Xkb/Jenner%20%26%20Block%20-%20ERISA%20Litigation%20Handbook%20(Final%20Version%20-%202021).pdf.

Brief for Encore Fiduciary as Amicus Curiae

at 22-23,

Parker-Hannifin Corp.

Johnson,

No. 24-1030 (U.S. May 21, 2025).

The Department's 1979 Investment Duties Regulation under section 404(a)(1)(B) of ERISA discusses the duties of the fiduciary when selecting investments, including taking into consideration the risk of loss and the opportunity for gain associated with the investment compared to that of reasonably available alternatives with similar risks. Additionally, it highlights certain factors that should be weighed, including diversification benefits, liquidity, current cash flow relative to the plan's anticipated cash flow, and the projected return. However, the statute is agnostic regarding how a fiduciary demonstrates that it carefully evaluated those issues and acted prudently in its decision to make the selection. As a result, fiduciaries, lacking clarity and guidance, may avoid making selections that could be beneficial to plan participants and beneficiaries but whose selection may be more challenging to justify and, therefore, more vulnerable to litigation. This has particularly been an issue with regards to the inclusion of alternative assets in defined contribution plan investment menus because alternative assets often require different valuation and liquidity considerations than publicly traded stocks and bonds.

Taylor D. Nadauld, Berk A. Sensoy, Keith Vorkink & Michael S. Weisbach,

The Liquidity Costs of Private Equity Investments: Evidence from Secondary Market Transactions,

132 J. Fin. Econ. 158, 158-181 (2019),

https://doi.org/10.1016/j.jfineco.2018.11.007.

12.2.2. Current Use of Alternative Investments in Retirement Plans

In directing the Department to pursue these objectives, the Executive Order points out that a number of alternative investments are already utilized in some state and local as well as private-sector defined benefit plans. In 2022, 99 percent of state and local government defined benefit pension plans held some share of their portfolio invested in alternative investments—namely private equity, hedge funds, real estate, and commodities—with these alternative investments representing 34 percent of all holdings for public pension funds.

71,72

A 2023 survey of Fortune 1000 defined benefit pension plans found that 68 percent of those plans held alternative investments, which in aggregate represented 18 percent of total holdings. However, the share of holdings for these plans varied significantly by plan size, with larger Fortune 1000 plans allocating more than 4 times as much to alternative assets in 2023 than their smaller counterparts, presumably due to in-house expertise and economies of scale.

The experience of public plans and private defined benefit plans investing in alternative assets is discussed in greater detail in section 12.7.3.1.4.

This analysis was conducted using the

Public Plans Database

(PPD), which consists of roughly 220 major public pension plans (118 state and 100 local) that represent over 95 percent of total U.S. state and local pension assets and membership.

Jean-Pierre Aubrey,

Public Pension Investment Update: Have Alternatives Helped or Hurt?,

Ctr. for Ret. Rsch. at Bos. Coll., Issue in Brief No. 22-20 (Nov. 22, 2022),

https://crr.bc.edu/public-pension-investment-update-have-alternatives-helped-or-hurt/.

Mercedes Aguirre & Brendan McFarland,

2023 Asset Allocations in Fortune 1000 Pension Plans,

Insider, Vol. 35, No. 2 (Feb. 2025),

www.wtwco.com/-/media/wtw/insights/2025/02/wtw-insider-2023-asset-allocations-in-fortune-1000-pension-plans.pdf?modified=20250225111427.

In contrast, defined contribution plans are far less likely to hold

alternative investments, with only 4 percent of defined contribution plans offering alternative investments in 2024, according to the 2025 PlanSponsor DC Plan Benchmarking Report.

When offered in defined contribution plans, alternative investments are typically limited to pooled, professionally managed funds, such as target date funds or managed accounts, and even then only by the largest defined contribution plans with significant resources to conduct due diligence. Smaller plans have generally avoided including these investments in their line-ups, as evaluating the offerings to ensure they meet valuation and liquidity requirements, finding appropriate benchmarks, and justifying complex fee structures has been extremely challenging.

As a result, only 0.1 percent of all defined contribution plan assets were in alternative investments in 2024.

PlanSponsor,

2025 DC Survey: Plan Benchmarking

(Jan. 7, 2025).

Jessica Johnson,

The Democratization of Alternative Investments in 401(k) Plans,

DCIO Insights (June 2022),

https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2022/06/A0704783.pdf.

Jessica Hall,

Private Equity in 401(k) Plans? Highly Risky for the Average Investor,

MarketWatch (Jan. 11, 2025),

https://www.morningstar.com/news/marketwatch/20250111254/private-equity-in-401k-plans-highly-risky-for-the-average-investor.

This has left defined contribution plans largely absent from an emerging financial sector without access to the fastest growing American companies. Since 2014, global private-equity markets have grown nine-fold, while public markets have only doubled.

While assets under management (AUM) in private capital represent only 2.4 percent of total financial assets, the market is growing, driven by an increasing number of U.S. companies remaining private and utilizing private sources to raise revenue.

Relatedly, “over the past few decades, there has been a structural shift in the composition of capital markets away from public markets and towards private markets.”

By discouraging defined contribution plans from including alternative investments in their line-ups, plan fiduciaries are restricting participants and beneficiaries from potential sources of retirement savings and growth.

Sanja Arya,

Breaking Barriers: Redefining Equity Market Portfolios with Venture Capital,

Morningstar Indexes (Nov. 2024),

https://assets.contentstack.io/v3/assets/bltabf2a7413d5a8f05/blt1aeeccec6ce5e015/6887a00b8c9c0c3eaeb99ee3/Breaking-barriers-Redefining-equity-market-portfolios-w-VC.pdf.

KKR,

An Alternative Perspective: Past, Present and Future,

Insights Global Market Trends (Sept. 2024),

https://www.kkr.com/content/dam/kkr/insights/pdf/2024-september-an-alternative-perspective.pdf.

Council of Econ. Advisers,

Retail Access to Alternative Investments Via Defined Contribution Plans

(Aug. 2025),

https://www.whitehouse.gov/research/2025/08/retail-access-to-alternative-investments-via-defined-contribution-plans/.

“As of the end of 2024, there are about 35 million private companies and fewer than 4,000 public companies in the US. From 1997 to 2024, the number of public companies decreased by about 55 percent from around 8,800 while the number of private companies increased by about 67 percent from around 20 million”.

12.2.3. Litigation Risk

Executive Order 14330 also instructed the Department “to prioritize actions that may curb ERISA litigation that constrains fiduciaries' ability to apply their best judgment in offering investment opportunities to relevant plan participants.”

In the past few decades, litigation alleging fiduciary breaches has surged, “evolving from individual claims to large-scale class-action lawsuits that often target the selection and monitoring of investment options and the negotiation of service provider fees.”

As a result, the possibility of litigation has become an additional factor when plan fiduciaries consider investment options. A 2025 convenience survey by the American Benefits Council of its defined contribution plan sponsor members found that roughly 29 percent of respondents, “decided against offering services or investment options simply because other similar plans were not doing so, making the additional services or options vulnerable to litigation.”

This development has raised concerns that plans may be avoiding more novel investment options that could improve participant outcomes because of potential litigation risk.

90 FR 38921 (Aug. 7, 2025).

Vahick A. Yedgarian & Ram Paudel,

Quantitative Analysis of Damages in ERISA Fiduciary Breach Litigation,

Fin. & Inv. Plan. Educator eJournal 1 (Sept. 9, 2025),

http://dx.doi.org/10.2139/ssrn.5461234.

Am. Benefits Council,

The Proliferating Risk of Baseless Retirement Plan Litigation is Harming Plan Participants and Retirement Security

(Oct. 2, 2025),

https://www.americanbenefitscouncil.org/pub/?id=80095a3f-cbb8-e46c-854f-a475d2c68358.

The more that specious complaints survive dismissal, the more a fiduciary might feel they have no choice but to offer, for example, only “a diversified suite of passive investments”—despite “actually think[ing] that a mix of active and passive investments is best.”

See

David McCann,

Passive Aggression,

CFO (June 22, 2016),

https://bit.ly/2Sl55Yq.

“Before the increases in 401(k) plan litigation, some fiduciaries offered more asset choice by including specialty assets, such as industry-specific equity funds, commodities-based funds, and narrow-niche fixed income funds[,] options [that] could potentially enhance expected returns in well-managed and monitored portfolios. ; George S. Mellman & Geoffrey T. Sanzenbacher,

401(k) Lawsuits: What Are the Causes and Consequences?,

Ctr. for Ret. Rsch. at Bos. Coll. 5 (May 2018),

https://bit.ly/3fUxDR1.

Now fiduciaries overwhelmingly choose purportedly “`safe' funds over those that could add greater value.”

Id.

The increasing risk of ERISA litigation has been well documented. An industry report documenting trends between 2020 and 2024, concluded that “ERISA class action filings are at a fever pitch” with all-time highs in 2024.

As documented in its brief for the

Parker-Hannifin Corp.

Johnson

appeal, Encore Fiduciary noted that, “[s]ince 2016 over half of plans with $1+ billion in assets have been targeted by at least one such lawsuit.”

Moreover, no target has been spared with “[a]ll types of plans, plan sponsors, and plan sizes being targeted in these trending ERISA class actions.”

From the period between 2020 and 2024, ERISA class actions have spread across plan types (

i.e.,

into defined benefit and group health plans) and penetrated deeper into the plan market, with smaller and smaller plans becoming targets.

CHUBB,

A Surprise Twist in ERISA Class Action Trends in 2024

(May 2025),

https://www.chubb.com/content/dam/chubb-sites/chubb-com/us-en/business-insurance/fiduciary-liability/pdfs/2024-fiduciary-infographic-final.pdf.https://www.chubb.com/content/dam/chubb-sites/chubb-com/us-en/business-insurance/fiduciary-liability/pdfs/2024-fiduciary-infographic-final.pdf.

Brief for Encore Fiduciary as Amicus Curiae, Parker-Hannifin Corp.

Johnson,

No. 24-1030 (U.S. May 21, 2025).

CHUBB,

A Surprise Twist in ERISA Class Action Trends in 2024

(May 2025),

https://www.chubb.com/content/dam/chubb-sites/chubb-com/us-en/business-insurance/fiduciary-liability/pdfs/2024-fiduciary-infographic-final.pdf.

CHUBB,

A Surprise Twist in ERISA Class Action Trends in 2024

(May 2025),

https://www.chubb.com/content/dam/chubb-sites/chubb-com/us-en/business-insurance/fiduciary-liability/pdfs/2024-fiduciary-infographic-final.pdf.

The costs have been profound on an individual plan level and across the market. Encore Fiduciary discussed the costs to plans of responding to litigation in its brief, arguing that:

[e]ven prevailing on a motion to dismiss can cost a defendant upwards of $2 million. If a plaintiff beats a motion to dismiss, defense costs skyrocket . . . . In addition to wading through document discovery and depositions, defendants must hire experts, who cost several millions of dollars. In Encore's experience, defense costs through summary judgment can run $5 million to $8 million. Taking a case to trial can cost $10 million or more . . . . Encore's tracking shows that there have been well over $1 billion in settlements since 2020, most for little more than the cost of defense.

Brief for Encore Fiduciary as Amicus Curiae, Parker-Hannifin Corp.

Johnson,

No. 24-1030 (U.S. May 21, 2025).

Separately, CHUBB estimates that attorneys' fees to defend an action through a motion for summary judgement may cost between $4 and $8 million. If the action goes to trial, plans may incur additional attorneys' fees

between $2 and $4 million as well as $2 million in experts' fees.

CHUBB,

Excessive Litigation Over Excessive Plan Fees in 2023

(2023),

https://www.chubb.com/content/dam/chubb-sites/chubb-com/us-en/business-insurance/fiduciary-liability/pdfs/excessive-litigation-over-excessive-plan-fees-infographic.pdf.

Unsurprisingly, these costs create a powerful incentive to settle even meritless claims, which have been borne out by the data. CHUBB reported that “the significant increase in the number of filings has been accompanied by a substantial uptick in the total annual number of settlements, which has increased six-fold from 2016 to 2022 . . . . At least 20% of the cases filed since 2016 cost more to defend than to settle.”

As Justice Alito summarized in his concurring opinion for

Cunningham,

“in modern civil litigation, getting by a motion to dismiss is often the whole ball game because of the cost of discovery. Defendants facing those costs often calculate that it is efficient to settle a case even though they are convinced that they would win if the litigation continued.”

CHUBB,

Excessive Litigation Over Excessive Plan Fees in 2023

(2023),),

https://www.chubb.com/content/dam/chubb-sites/chubb-com/us-en/business-insurance/fiduciary-liability/pdfs/excessive-litigation-over-excessive-plan-fees-infographic.pdf.

Cunningham

Cornell Univ.,

604 U.S. 693, 710 (2025) (Alito, J., concurring).

The result of this litigation to settlement system is, as Justice Alito pointed out in his concurring opinion in

Cunningham,

that “[t]he few plan participants named as plaintiffs and their attorneys get a windfall, and a cost that the administrator incurs may be passed on to the other plan participants.”

As noted in

Dura Pharmaceuticals, Inc.

Broudo,

the price of discovery (financial or otherwise) elevates the possibility that a “a plaintiff `with a largely groundless claim [will] simply take up the time of a number of other people, with the right to do so representing an

in terrorem

increment of the settlement value, rather than a reasonably founded hope that the [discovery] process will reveal relevant evidence.' ”

CHUBB estimates that one-third of settlements go to attorneys' fees.

Id.

at 711;

see also Pension Benefit Guar. Corp. ex rel. St. Vincent Catholic Med. Ctrs. Ret. Plan

Morgan Stanley Inv. Mgmt. Inc.,

712 F.3d 705, 719 (2d Cir. 2013).

544 U.S. 336, 347 (2005) (second alteration in original).

CHUBB,

A Surprise Twist in ERISA Class Action Trends in 2024

(May 2025),

https://www.chubb.com/content/dam/chubb-sites/chubb-com/us-en/business-insurance/fiduciary-liability/pdfs/2024-fiduciary-infographic-final.pdf.

This has had several perverse effects. Resources that could be used for real employee benefits are instead diverted to the defense and settlement costs described above—weakening the retirement security of the American worker by making it more expensive for plan sponsors to offer generous benefits.

Compounding this problem, insurers have raised premiums and retentions because they are struggling to build underwriting models that predict litigation exposure.

In its brief for the

Parker-Hannifin Corp.

Johnson

appeal, Encore Fiduciary noted an increase in retentions “from $1 million to as high as $15 million for many policies.”

Furthermore, because ERISA imposes personal liability on plan fiduciaries, there is a risk that this litigation epidemic will make it hard to find qualified advisers willing to step into that role.

Ultimately, with these increases in costs come a decreased likelihood that large employers will continue to offer generous voluntary retirement benefits, and that small employers will feel comfortable taking on the risk of exposure to litigation created by the simple act of voluntarily sponsoring a retirement plan for employees.

Fid Guru Blog,

Has ERISA Class Action Litigation Made a Positive Difference for Plan Participants?

(Oct. 31, 2023),

https://encorefiduciary.com/has-erisa-class-action-litigation-made-a-positive-difference-for-plan-participants/.

Ed. Antonucci, CRC GROUP,

Surge in Excessive Fee Litigation is Impacting Fiduciary Liability Insurance

(March. 2021),

www.crcgroup.com/Portals/34/Flyers/Tools-Intel/Fiduciary%20Liability%20Excess%20Fee%20Litigation.pdf?ver=2021-03=19-133939-113.

Brief for Encore Fiduciary as Amicus Curiae, Parker-Hannifin Corp.

Johnson,

No. 24-1030 (U.S. May 21, 2025).

Id.

The assumption that litigation risk is impacting the menu offerings in participant-directed plans was corroborated by Gropper (2025), which examined the probability of litigation and its impact on the number and volatility of investment options offered.

Using actual court cases to model the likelihood of litigation for plans based on recordkeeper, year, and retirement plan-by-asset class fixed effects (such as state and industry), as well as Form 5500 data on plan investments, Gropper finds that, controlling for plan size, retirement plans with a greater probability of being sued have fewer menu options.

100

He further finds that defined contribution plans with a higher predicted likelihood of being sued are more likely to exclude high volatility investments, indicating that litigation risk does impact the number and type of investments offered to retirement plan investors.

101

Michael Gropper,

Lawyers Setting the Menu: The Effects of Litigation Risk on Employer-Sponsored Retirement Plans

(Aug. 2025),

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4393420.

100

Id.

101

Id.

These findings suggest that plan fiduciaries may be excluding more complex investment options from their investment line-ups, not necessarily in response to a prudent assessment of whether the features in those investments are best suited to the needs of plan participants and beneficiaries, but rather because of the risk of litigation if plan fiduciaries depart from more traditional investments in favor of more creative or novel options. Without assurances that the application of a prudent process to select designated investment alternatives will help shield them from the risk of excessive litigation about such selection, defined contribution plan fiduciaries will continue to limit offerings of innovative plan options that would potentially enhance plan participants' and beneficiaries' retirement savings.

12.2.4. Summary

Defined contribution plans largely rely on the 1979 Investment Duties Regulation when designing their process for selecting designated investment alternatives in their menus. Defined contribution plan fiduciaries have generally avoided including investments that make them more vulnerable to claims of imprudence and potential litigation. As a result, defined contribution plans have severely limited incorporating alternative assets in their investment strategies, restricting the tools plan fiduciaries can employ to improve diversification, including through downside protection, potential net returns, and retirement savings outcomes for plan participants and beneficiaries. This proposed rule, by providing a safe harbor that is asset neutral, will clarify and provide protection for defined contribution plan fiduciaries in their requirements for prudently selecting in

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