A 401(k) Plan ‘Alternative’ Proposal: Will DOL Safe-Harbor Provide Smooth Sailing?

Overview

On March 31, 2026, the Department of Labor (“DOL”) issued a proposed regulation (the “Proposed Regulation”) that addresses the duties that a fiduciary of a participant-directed defined contribution plan—such as a 401(k) plan (a “Plan”)—has under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) when selecting investment options for Plan participants to choose in allocating their Plan accounts. The Proposed Regulation follows an executive order issued by President Trump in August of last year (the “Executive Order”) intending to expand access to alternative assets (such as private equity, real estate, private credit and digital assets) in Plans and also address “regulatory overreach” and “litigation risks” that have limited the offering of alternative assets in such Plans. Further information about the Executive Order may be found HERE.

The DOL’s press release, announcing its issuance of the Proposed Regulation, highlights its focus on enhancing access to alternative asset strategies, such as private equity, real estate and other “alternative” assets (collectively “Alternative Assets”) as a component of a broader balanced, “target-date” or “life-cycle” investment product for Plans. Indeed, the DOL’s fact sheet is entitled “US Department of Labor proposes landmark rule to democratize access to alternative investments in 401(k) plans.”¹ And while many had expected that Alternative Assets would be the primary focus of the Proposed Regulation, it in fact goes beyond that limited landscape. More specifically, the Proposed Regulation applies to the selection of any investment alternative offered on a Plan investment menu into which Plan participants and beneficiaries may direct the investment of their individual account.

Principal Legal Areas of Focus and Commercial Impacts

The Proposed Regulation sets out six non-exclusive factors that the DOL believes are important to empower Plan fiduciaries to exercise their own judgment and diligence in making what they consider to be prudent decisions in the best interests of Plan participants—without undue fear of litigation over each good faith judgment call. We believe that while important, the Proposed Regulation may not be transformative either with respect to access by Plan access to Alternative Assets or more generally. For example, it does not fundamentally alter the long-standing principles by which Plan fiduciaries make prudent decisions. Common sense and prudence are not new. Nor has the maxim “prudence is process” been repealed. Still, we think that some market participants will regard the DOL’s efforts favorably.

• Central focus is litigation risk: not structural reform. 
  • The Proposed Regulation attempts to address the “fear factor” of litigation risk associated with Plan fiduciaries selecting investment options—including those with exposure to Alternative Assets.² The DOL indicates that “[a] plan fiduciary that objectively, thoroughly, and analytically considers and makes a determination regarding any or all of the six factors [of the Proposed Regulation] should be able to confidently rely on that determination without undue fear of litigation.” [Emphasis supplied].
  • is important to note that the DOL has been simultaneously pursuing litigation and amicus briefs that are complementary to its regulatory effort—and aggressively so.
  • The Proposed Regulation does not address some of the more long-lived and deep structural issues that have limited—and will continue to limit (absent other regulatory changes)—direct 401(k) Plan participant access to Alternative Assets. For further information about these long-standing structural issues, please see Part 2 of our Investment Lawyer article HERE.
• Alternative assets product innovation is unlikely. 
  • By corollary, we would not expect the Proposed Regulation to result in substantial product innovation with respect to Alternative Assets.
  • The familiar contours of what has been feasible for decades, and which have shown recent signs of renewed energy—so-called target-date, life-cycle and other “allocator” strategies of which Alternative Assets are a component—will continue to be the likely theatre of operations for the near future.³
  • Liquidity, fees, valuation and benchmarking will continue to be important for this purpose.
• Applicable to all plan investment option selections (but not monitoring). As mentioned above, the guidance is applicable to all Plan investment options—not just Alternative Assets. But it technically only deals with the selection of Plan investment options—not the prudent monitoring of them. 
  • While the preamble offers some helpful guidance on this front, DOL says that it anticipates issuing future guidance on fiduciary duties with respect to the monitoring of Plan investments.

In the end, the Proposed Regulation offers the ability to address what the Executive Order regards as “burdensome lawsuits that seek to challenge reasonable decisions by loyal, regulated fiduciaries,” “stifling Department of Labor guid­ance”, and rules that promote the “encouragement of lawsuits filed by opportunistic trial lawyers”, while exploring ways to help fiduciaries prudently balance potentially higher expenses against the objectives of seeking greater long-term net returns and broader diversification of investments. The DOL reasserts the long-standing position that prudence is supposed to be evaluated based on the fiduciary’s investigation and reasoning at the time of the decision—not by hindsight or subsequent performance. The Proposed Regulation also restates the fact that courts defer to fiduciaries who follow a prudent process. When fiduciaries act within a documented, reasonable decision‑making framework, their judgments should receive substantial judicial deference. The DOL strongly suggests in the preamble that an “abuse of discretion” standard will apply regardless of the applicability of the safe harbor.⁴

Nevertheless, the Proposed Regulation does offer some helpful “scaffolding” to assist Plan fiduciaries in approaching investment decisions. And the DOL believes that “the process-based safe harbor provided by the proposed rule would decrease plan fiduciary uncertainty about whether they are satisfying their duty of prudence when making such a selection and reduce the associated litigation risks of that selection.” The key question is whether, if finalized in its currently proposed form, and in concert with other DOL activity, Plan fiduciary behavior will be altered.⁵

The Six Factors

• Performance. The fiduciary must appropriately consider a reasonable number of similar alternatives and determine that the risk-adjusted expected returns, over an appropriate time horizon and net of anticipated fees and expenses, further the purposes of the Plan by enabling participants to maximize risk-adjusted returns.
• Fees. The fiduciary must appropriately consider a reasonable number of similar alternatives and determine that fees and expenses are appropriate, taking into account risk-adjusted expected returns and any other value the investment brings to furthering the purposes of the Plan. For this purpose, “value” includes benefits, features, or services beyond risk-adjusted returns.
• Liquidity. The fiduciary must appropriately consider and determine that the designated investment alternative will have sufficient liquidity to meet the Plan's anticipated needs at both the Plan and individual levels.
• Valuation. The fiduciary must appropriately consider and determine that the designated investment alternative has adopted adequate measures to ensure it is capable of being timely and accurately valued in accordance with the needs of the Plan, and free of conflicts of interest.
• Benchmark. The fiduciary must appropriately consider and determine that each designated investment alternative has a meaningful benchmark and compare the risk-adjusted expected returns to that benchmark. The DOL notes 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.”
• Complexity. The fiduciary must appropriately consider the designated investment alternative’s complexity and determine that it has the skills, knowledge, experience, and capacity to comprehend the investment sufficiently to discharge its obligations under ERISA and the Plan documents—or whether it must seek assistance from a qualified investment advice fiduciary, investment manager, or other professional.

Some Overarching Themes of Safe Harbors

• Watchwords:
  • “Risk Adjusted”
  • “Appropriate Time Horizon”
  • “Net of Anticipated Fees and Expenses.”
• Strong nod to independent unconflicted advisors. Many of the safe harbor examples presume (and others suggest) that a third-party unconflicted “Section 3(21)” fiduciary help advise the Plan fiduciaries.
• Liquidity assessed at plan and participant levels. The Proposed Regulation contains a number of examples designed to showcase the need for Plan sponsors to appropriately consider both Plan-level and participant-level liquidity considerations.⁶
• Apples and oranges—rule 22e-4 and FASB 820
  • “Conflict-free” valuation and reliance on representations. The Proposed Regulation highlights the apparent importance in certain circumstances that the DOL places on obtaining written representations from the underlying managers of investment alternatives and the Plan’s investment advisors, particularly with respect to valuation processes that are “conflict-free [and], independent” and conducted “no less frequently than quarterly” in accordance with FASB Rule 820.
    • “Conflict-free” is a very demanding standard; query whether a better approach might involve disclosure and mitigation of conflicts instead.
    • It is unclear as a practical matter the extent to which those representations will be commercially attractive, inhibitive or utilitarian.
    • It is also unclear to what level the “conflict-free” valuation standards would apply. In the context of a target-date or similar “allocator” product, one would presume the DOL wished to limit conflicts at the target-date or similar “allocator” level, but not necessarily at any unrelated third party manager of Alternative Assets selected by it. To be sure, while there may be prudence obligations under ERISA in selecting and monitoring those third party providers (depending on the nature of the “allocator”), it would be unusual for valuation conflicts to arise because the allocator takes the marks of its unrelated third party managers.
  • Universalizing mutual fund liquidity management. The Proposed Regulation provides that compliance with Rule 22e-4 of the Investment Company Act of 1940 (requiring registered mutual funds to adopt and implement liquidity risk management programs) or, in certain other circumstances, where the investment alternative is not such a mutual fund, but it adopts and implements such a liquidity risk management program, may be deemed to satisfy the liquidity requirement. Investment alternatives that are not registered mutual funds may not be accustomed to relying on this rule.
• Read examples closely. The Proposed Regulation focuses on a prudent Plan fiduciary’s ability to evaluate risk-adjusted expected returns of the alternative, over an appropriate time horizon and net of anticipated fees and eFxpenses. While no set of examples articulating a principles-based approach can cover all facts and circumstances, it is important that the context of each example be read carefully. For instance:
  • An example provides that a Plan fiduciary may choose an investment alternative with higher fees among “alternatives with comparable risk-adjusted return” because customer service [is regarded as] an enhancement to the value proposition.” However, it is unclear what weight should be given to the fact that the example refers to “five stock funds that follow similar strategies in passively tracking the same index.” The example also indicates that the fiduciary must also consider a “reasonable number” of “similar investment options” and determine that the relevant fees and expenses are appropriate taking into consideration risk-adjusted returns and any other value.
  • Another example demonstrates that a Plan fiduciary may choose to include both passive and active strategies for the same asset class and style. However, the example indicates that the decision is based on the advice of an unconflicted fiduciary adviser who advises that gaining exposure to both active and passive strategies “increases participants’ risk adjusted returns on investment net of additional fees charged by the actively managed funds.”
  • Where a Plan fiduciary chooses either exposure to Alternative Assets or lifetime income (i.e., an annuity) in the context of a target-date fund or similar product, the examples speak of an existing investment alternative without such exposure or lifetime income option which would be both retained and a separate one which would be “cloned” with such additional exposures or option. Moreover, these examples presuppose the use of an unconflicted advice fiduciary , which, in the case of an Alternative Assets sleeve advises the Plan fiduciary that “the expense ratio [of the existing target-date fund] would increase slightly over the existing investment alternative, but [result in an] improvement in risk-adjusted expected returns, net of fees, over the time horizon indicated for the target-date fund”; and in the context of the lifetime annuity option advises that the expense ratio is the same but that the additional fee occasioned by the additional lifetime income feature secures “more favorable annuity conversion rates throughout the life of the contract than would be available outside the contract. Maintaining both such options is not unreasonable.
• Don’t forget about the contours of the investment menu itself. Plan investment menu construction (i.e., number of investment alternatives, asset classes etc.) must itself be determined prudently to “enable participants and beneficiaries in such plan to maximize risk-adjusted returns, net of fees, on investment across their entire portfolios” in the Plan.

Complementary Architecture -- The DOL’s Full-“Court” Press

The Proposed Regulation should likely not be regarded in a vacuum. In fact, the DOL has been relatively activist in the courts in ways that complement the stated purposes of the Proposed Regulation. Indeed, Assistant Secretary of Labor Daniel Aronowitz was reported to have underscored that “[w]e want to restore ERISA as a law process, and we want to push back on regulation by litigation . . .”⁷ This focus on “process” was buttressed with comments by DOL Deputy Secretary Keith Sonderling in the Wall Street Journal: “We have an industry living in fear . . . that a judge or lawyer is going to second guess decisions. . . . We have to eliminate that.”⁸

Most recently, the United States Supreme Court has granted certiorari in Anderson v. Intel Corp, which presents the question of whether ERISA plaintiffs alleging imprudent investment decisions based on fund underperformance must plead a “meaningful benchmark” at the motion-to-dismiss stage. In that case, the Intel plan offered customized target date funds and a customized global diversified fund with allocations to Alternative Assets including hedge funds and private equity.⁹ The case may help clarify what suffices as a benchmark—something addressed in the Proposed Regulation.¹⁰ Certainly, the potential for a landmark decision on ERISA’s pleading standards concerning plaintiffs’ allegations of imprudent investment decisions could be very important not only generally, but also for purposes of those strategies that involve Alternative Assets.

In addition, the DOL has been active in filing amicus briefs in a number of other important Federal cases, whose outcome may bear on the legal and overall cultural milieu in which Plan sponsors effect decision-making. In one recently filed brief to the Supreme Court concerning a Plan sponsored by Home Depot, it argued that Plan participants should be required to prove harm when accusing Plan sponsors or investment committees of breaches of fiduciary duty.¹¹ In the past—and in particular, in this very case when argued before the 11^th Circuit—the DOL had maintained the exact opposite.¹² Indeed, the plaintiffs in this case chose to drop their challenge of the 11^th Circuit’s decision. DOL officials apparently believed that their amicus brief had the decisive effect.¹³ Similarly, in another recent case, the DOL submitted an amicus brief to the Supreme Court concerning the pleading standards for a class action challenging a Plan sponsor’s selection of a target-date fund.¹⁴ There it recently argued that the Sixth Circuit erred when it permitted the case to proceed even though the plaintiffs did not provide a comparable benchmark (other than a S&P target-date fund index) to support the allegation that the investment option underperformed.¹⁵ Most recently, the DOL has taken a similar position in a Second Circuit case involving Yale University, reversing an earlier Biden Administration amicus brief in 2023. ¹⁶

Next Steps

Comments in respect of the Proposed Regulation are due June 1, 2026 (60 days from its publication in the Federal Register). Plan fiduciaries and sponsors or managers of investment options (or components of investment options) for Plans will want to begin to study the safe harbors provided in anticipation of the Proposed Regulation being finalized. Many may find opportunities for improvement even if they are regarded as positive developments.

Those thinking beyond the four corners of the Proposed Regulation to the aims of the Executive Order that spawned it may wish to consider other possible avenues of regulatory reform. For example, the Executive Order directed the Securities and Exchange Commission to consider actions with respect to the definitions of accredited investor and qualified purchaser. Some of these are detailed in Part 3 of our Investment Lawyer article (even as the Proposed Regulation would appear to apply those suggestions insofar as they relate to the matters covered by it).

 As always, Plan fiduciaries should continue to maintain a prudent process with respect to all investment decisions, as well as exercising appropriate discipline in maintaining a clear, documented record. Such a record should ideally confirm the steps the fiduciaries have walked through, such as by providing evidence of due consideration of the relevant factors they have deemed to be prudent. These may include the factors included in the Proposed Regulation. But, as always, we believe there is no single recipe that applies (or should apply) to any given case. And we believe that while the Proposed Regulation offers much food for thought, it already exhibits what we observe in the market as best practices.

Assuming the Proposed Regulation will be finalized in similar form, product manufacturers may wish to consider the safe harbors and carefully study the examples. They may wish to pay particular attention to the examples associated with benchmarks, and those associated with liquidity and valuation. Depending on the type of product (i.e., registered mutual fund; CIT; unregistered fund), fund sponsors and investment managers may wish to consider commenting on the feasibility of the apparent universality of Investment Company Act of 1940 standards for liquidity management, or FASB rules with respect to valuation. Those that do not have “conflict-free” valuation protocols may need to consider what additional steps, if any, they may need to effect, or comments they need to provide to assure the ongoing viability of their products to the Plan market.

Conclusions: The Proposed Regulation Is Important—But May Not Be Transformative

The Proposed Regulation will be welcomed by many as offering additional points of reference. It should be regarded as helping to provide scaffolding for decision-making in key areas in which Plan fiduciaries act with respect to Plan investments. Many of the safe harbor examples likely already correspond to best (if not already ubiquitous) practices in the market. In this respect, the Proposed Regulation reflects common sense. In so doing, the DOL has indicated that it believes the Proposed Regulation and safe harbor offer “clarity to defined contribution plan fiduciaries on how to satisfy their obligation of prudence when selecting individual investments within a plan menu,” and that “by describing an objective, thorough, and analytical process to evaluate and determine the selection of an investment that is neutral across product types” the Proposed Regulation “will enable responsible plan fiduciaries to consider all prudent and appropriate investment vehicles and confidently make menu selections that will improve retirement savings outcomes for plan participants and beneficiaries .”

The Proposed Regulation may also help to advance the purposes of the Executive Order and provide greater shape to current cultural expectations associated with Plan investments. As with any principles-based rule, any such pronouncement is by its nature limited. It can never serve as a complete shield to litigation—nor should it. ERISA is a complex statute with defined duties with extremely high standards of care. Nothing in the Proposed Regulation serves to abrogate that. However, for those that believe—as the current Administration does—that there may be an ERISA “market failure” occasioned by fear of making otherwise prudent decisions in the best interests of Plan participants because of the specter of opportunistic litigation, the Proposed Regulation attempts to strike a more equal balance. The Proposed Regulation stops short of providing a roadmap for demonstrating prudence across a Plan’s investment menu, but it offers many of—and gives voice to—the factors that are likely common to many existing best practices.

Issues associated with Plan investments in Alternative Assets remain complex. And while the Proposed Regulation may serve an important role in shaping the cultural expressions of risk, many of the historic structural and operational challenges remain. We would expect that products with respect to Alternative Assets will for the foreseeable future be those that have already been brought to market in the flavor of target-date, life-cycle, asset allocation, or similar balanced approaches as to which the Alternative Assets exposure is a component. Such “Allocator” strategies involve a number of complexities, but the pathway to realization has been known for decades and is being harvested by some more recently. The Proposed Regulation (if finalized) may make otherwise prudent decisions to access such products a little more comfortable for some; and developments in the courts may provide additional information to guide Plan sponsor receptivity to add Alternative Asset strategies to Plans. 

Whether this is the beginning or the final chapter of regulatory guidance emanating from the Executive Order, the Proposed Regulation will likely also help shape expectations, and of course realities. It will be interesting to see what “alternatives” come next.