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Proposed Rule2026-06178

Fiduciary Duties in Selecting Designated Investment Alternatives

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Published

March 31, 2026

Issuing agencies

Labor DepartmentEmployee Benefits Security Administration

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<title>Federal Register, Volume 91 Issue 61 (Tuesday, March 31, 2026)</title>
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[Federal Register Volume 91, Number 61 (Tuesday, March 31, 2026)]
[Proposed Rules]
[Pages 16088-16144]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-06178]

[[Page 16087]]

Vol. 91

Tuesday,

No. 61

March 31, 2026

Part II

Department of Labor

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Employee Benefits Security Administration

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29 CFR Part 2550

Fiduciary Duties in Selecting Designated Investment Alternatives;
Proposed Rule

Federal Register / Vol. 91 , No. 61 / Tuesday, March 31, 2026 /
Proposed Rules

[[Page 16088]]

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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.

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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:
<bullet> Federal eRulemaking Portal: <a href="http://www.regulations.gov">http://www.regulations.gov</a>.
Follow the instructions for submitting comments.
<bullet> 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 <a href="http://www.regulations.gov">http://www.regulations.gov</a> and <a href="http://www.dol.gov/ebsa">http://www.dol.gov/ebsa</a>, 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 <a href="https://www.regulations.gov">https://www.regulations.gov</a> 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.\1\ 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.
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\1\ E.O. 14330 (Aug. 7, 2025), reprinted in 90 FR 38921 (Aug.
12, 2025).
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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).\2\
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\2\ 29 CFR 2550.404a-1.
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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.'' \3\

[[Page 16089]]

And second, the fiduciary must have ``acted accordingly.'' \4\
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\3\ 29 CFR 2550.404a-1(b)(1)(i).
\4\ 29 CFR 2550.404a-1(b)(1)(ii).
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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.\5\ 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[.]'' \6\ 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.\7\
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\5\ 29 CFR 2550.404a-1(b)(2).
\6\ 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.
\7\ 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).
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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.\8\
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\8\ 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.
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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.\9\ 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.'' \10\
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.
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\9\ U.S. Dep't of Labor, Employee Benefits Security Admin.,
Advisory Opinion 81-12A (Jan. 15, 1981), available at <a href="https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/1981-12a.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/1981-12a.pdf</a>.
\10\ 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 Sec. 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.'').
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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.\11\ 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.
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\11\ U.S. Dep't of Labor, Employee Benefits Security Admin.,
Information Letter to Eugene Ludwig (Mar. 21, 1996), available at
<a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/03-21-1996">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/03-21-1996</a>.
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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

[[Page 16090]]

plan.\12\ 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.
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\12\ U.S. Dep't of Labor, Employee Benefits Security Admin.,
Advisory Opinion 2006-08A (Oct. 3, 2006), available at <a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2006-08a">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2006-08a</a>.
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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,\13\ explicitly attempt to manage volatility
as participants near the age when they will need to draw down their
money in retirement.
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\13\ In 2022, EBSA analysis of BrightScope data for audited
retirement plans found 91 percent of 401(k) plans offered at least
one TDF.
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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.\14\ 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.
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\14\ U.S. Dep't of Labor, Employee Benefits Security Admin.,
Information Letter to Jon W. Breyfogle (June 3, 2020), available at
<a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020</a>.
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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.\15\
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\15\ U.S. Dep't of Labor, US Department of Labor Rescinds 2021
Supplemental Statement on Alternative Assets in 401(k) Plans (Aug.
12, 2025), <a href="https://www.dol.gov/newsroom/releases/ebsa/ebsa20250812">https://www.dol.gov/newsroom/releases/ebsa/ebsa20250812</a>
(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), <a href="http://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020-supplemental-statement">www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020-supplemental-statement</a>.
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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.\16\
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\16\ See also U.S. Dep't of Labor, Employee Benefits Security
Admin., Information Letter to Christopher Spence (Dec. 22, 2016),
available at <a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/12-22-2016">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/12-22-2016</a>; U.S.
Dep't of Labor, Employee Benefits Security Admin., Information
Letter to J. Mark Iwry (Oct. 23, 2014), available at <a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/12-22-2016">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/12-22-2016</a>.
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2.4. Case Law

The fiduciary duty of prudence under section 404(a)(1)(B) of ERISA
has been examined in a number of court cases, as discussed below. These
cases also have informed the development of the Department's proposal.
2.4.1. Duty of Prudence Applies to Selection of Designated Investment
Alternatives
Under section 404(a)(1)(B) of ERISA, plan fiduciaries must
discharge their duties ``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.'' 29 U.S.C.
1104(a)(1)(B). This duty of prudence applies to plan fiduciaries in
selecting and monitoring the designated investment alternatives in an
individual account plan. See Tibble v. Edison Int'l, 575 U.S. 523, 529
(2015).
2.4.2. Duty of Prudence Focuses on Process at the Time of the Decision
The defining characteristic of the duty of prudence is that it is
``largely a process-based inquiry.'' Smith v. CommonSpirit Health, 37
F.4th 1160, 1166 (6th Cir. 2022); see also Matousek

[[Page 16091]]

v. MidAmerican Energy Co., 51 F.4th 274, 278 (8th Cir. 2022) (noting
that for the duty of prudence, ``[t]he process is what ultimately
matters''). Thus, prudence is assessed based on a fiduciary's
investigation at the time of the investment decision, and not in
hindsight based on the investment results. See, e.g., Sacerdote v. N.Y.
Univ., 9 F.4th 95, 107 (2d Cir. 2021) (stating that courts ``must judge
a fiduciary's actions based upon information available to the fiduciary
at the time of each investment decision and not from the vantage point
of hindsight'' (internal quotations omitted)); Harris v. Amgen, Inc.,
788 F.3d 916, 936 (9th Cir. 2015) (``[T]he proper question'' in
evaluating an ERISA claim ``is not whether the investment results were
unfavorable, but whether the fiduciary used appropriate methods to
investigate the merits of the transaction.'' (internal citation and
quotations omitted)), rev'd and remanded on other grounds, 577 U.S. 308
(2016); PBGC ex rel. Saint Vincent Cath. Med. Ctrs. Ret. Plan v. Morgan
Stanley Inv. Mgmt. Inc., 712 F.3d 705, 716 (2d Cir. 2013) (focusing
``on a fiduciary's conduct in arriving at an investment decision, not
on its results'' (citation omitted)); DiFelice v. U.S. Airways, Inc.,
497 F.3d 410, 424 (4th Cir. 2007) (``[W]hether a fiduciary's actions
are prudent cannot be measured in hindsight . . . [T]he prudent person
standard is not concerned with results; rather it is a test of how the
fiduciary acted viewed from the perspective of the time of the
challenged decision.'' (emphasis added) (internal citations and
quotations omitted); In re Unisys Sav. Plan Litig., 74 F.3d 420, 434
(3d Cir. 1996) (stating that the duty of prudence focuses on ``a
fiduciary's conduct in arriving at an investment decision, not on its
results, and asking whether a fiduciary employed the appropriate
methods to investigate and determine the merits of a particular
investment'' (emphasis added)). In short, this duty ``requires
prudence, not prescience.'' DeBruyne v. Equitable Life Assur. Soc'y of
U.S., 920 F.2d 457, 465 (7th Cir. 1990) (internal citation omitted);
see also Reetz v. Aon Hewitt Inv. Consulting, Inc., 74 F.4th 171, 182
(4th Cir. 2023) (``Prudence does not mean clairvoyance.'').
2.4.3. The Duty of Prudence Does Not Contain Categorical Restrictions
on Investments
The same principles of prudence apply to any investment decision,
regardless of the nature of the investment. For example, in Anderson v.
Intel Corp. Investment Policy Committee, 137 F.4th 1015 (9th Cir.
2025), cert. granted, No. 25-498 (Jan. 16, 2026), the court's dismissal
of the plaintiff's claim suggested that a fiduciary's inclusion of
investments in hedge funds and private equity funds, as part of a
diversified target date fund, was not inconsistent with prudence
because the plan followed a prudent process in determining that the use
of the products as part of the plan's risk reduction strategy with
long-term conservative growth goals was appropriate. Id. at1024. See
also Carlisle v. Teamsters Board of Trustees, No. 25-511-cv, 2025 WL
3251154, at *3 (2d Cir. Nov. 21, 2025) (dismissing fiduciary breach
claim based on a theory that private market investments are imprudent
because allegations did not indicate that fiduciaries did more than
engage in the normal practice of weighing ``tradeoffs'' and selecting
from a ``range of reasonable judgments'' in the circumstances).
Similarly, in Taylor v. United Technologies Corp., the court rejected
the argument that actively managed funds (i.e., funds with portfolio
managers that pick and choose investments in pursuit of the fund's
performance objectives) were necessarily imprudent simply because some
evidence tended to show that passively managed funds (also referred to
as index funds because such funds seek to track the returns of a market
index) generally outperformed actively managed funds. No. 3:06CV1494,
2009 WL 535779 (D. Conn. Mar. 3, 2009), aff'd, 354 F. App'x 525 (2d
Cir. 2009).
It is not surprising that ERISA contains no categorical
restrictions on investment type. When Congress enacted ERISA, it did
not require employers to establish benefit plans. Rather it crafted a
statute intended to encourage employers to offer benefit plans while
also protecting the benefits promised to employees. See, e.g.,
Conkright v. Frommert, 559 U.S. 506, 516 (2010); see also H.R. Rep. No.
93-533 at 9 (1973), reprinted in 1974 U.S.C.C.A.N. 4639, 4647 (noting
that ERISA ``represents an effort to strike an appropriate balance
between the interests of employers and labor organizations in
maintaining flexibility in the design and operation of their pension
programs, and the need of the workers for a level of protection which
will adequately protect their rights and just expectations'').\17\
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\17\ In fact, when Congress considered requiring plans to offer
at least one index fund on plan menus, the proposal failed. See H.R.
3185, 110th Congress (2007). And the Department concurred and
continues to concur with that decision. 401(k) Fee Disclosure:
Helping Workers Save for Retirement: Hearing Before the S. Comm. On
Health, Education, Labor, and Pensions, 110th Cong. 15 (2008)
(statement of Bradford P. Campbell, Assistant Sec'y of Labor)
(``Requiring specific investment options would limit the ability of
employers and workers together to design plans that best serve their
mutual needs in a changing marketplace.'').
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Indeed, Congress knew that if it adopted a system that was too
``complex,'' then ``administrative costs, or litigation expenses,
[would] unduly discourage employers from offering . . . benefit plans
in the first place.'' Varity Corp. v. Howe, 516 U.S. 489, 497 (1996).
Congress also knew that plan sponsors and fiduciaries must make a range
of decisions and accommodate ``competing considerations,'' often during
periods of considerable market uncertainty. H.R. Rep. No. 96-869, at 67
(1980), reprinted in 1980 U.S.C.C.A.N. 2918, 2935. As a result,
Congress designed a statutory scheme that affords plan sponsors and
fiduciaries considerable flexibility.\18\
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\18\ This flexibility extends to other areas of ERISA fiduciary
decision making that are not discussed, in detail, in this proposed
regulation. For example, plan fiduciaries of participant-directed
individual account plans have discretion to make decisions, often
involving ``difficult tradeoffs,'' Hughes v. Northwestern
University, 595 U.S. 170, 177 (2022), when considering, the size of
plan investment menus, investment styles, the structure of
investment options, and default investment options for plan
participants who have not made a decision about how to allocate
their individual investment accounts.
---------------------------------------------------------------------------

2.4.4. Decisions Based on a Prudent Process Are Entitled to Significant
Deference Including Under the Proposed Regulation's Safe Harbor Factors
Assessing the duty of prudence is naturally deferential and context
specific, reflecting a fiduciary's discretion and flexibility in
selecting among a range of options. See Donovan v. Cunningham, 716 F.2d
1455, 1467 (5th Cir.1983) (stating that the prudence requirement is ``a
flexible standard,'' such that the adequacy of a fiduciary's
independent investigation and ultimate investment selection is
evaluated in light of the ```character and aims' of the particular type
of plan he serves''); Vigeant v. Meek, 953 F.3d 1022, 1028 (8th Cir.
2020) (same). In other words, under a prudence inquiry, there is no one
single right answer given the almost innumerable appropriate options
available to fiduciaries. Chao v. Merino, 452 F.3d 174, 182 (2d Cir.
2006) (ERISA does not require a fiduciary to take ``any particular
course of action'' so long as the fiduciary's decision meets the
prudent person standard). Therefore, the Supreme Court has instructed
the courts to ``give due regard to the range of reasonable judgments a
fiduciary may make based on her experience and expertise,'' as ``the
circumstances facing

[[Page 16092]]

an ERISA fiduciary will implicate difficult tradeoffs.'' Hughes v.
Northwestern University, 595 U.S. 170, 177 (2022). And, as discussed
above, a fiduciary must act based on ``the circumstances as they
reasonably appear to [the fiduciary] at the time when he does act and
not at some subsequent time when his conduct is called into question.''
Smith v. CommonSpirit Health, 37 F.4th 1160, 1164 (6th Cir. 2022)
(quoting Restatement (Second) of Trust section 174 cmt. B (1959)). In
other words, subjecting a fiduciary to constant Monday morning
quarterbacking over its decisions, with the benefit of 20/20 hindsight,
would eviscerate the discretion that is at the core of the statutory
framework.
In an action alleging a breach of fiduciary duty, as in other forms
of litigation, the Supreme Court's default rules apply meaning
plaintiffs bear the burden of proof and persuasion on the elements of
their claim. Schaffer ex rel. Schaffer v. Weast, 546 U.S. 49, 58 (2005)
(``[P]laintiffs bear the burden of persuasion regarding the essential
aspects of their claims''). This is true not just with respect to the
existence of a breach (as relevant here, whether a fiduciary failed to
follow a prudent process) but also, in the view of the Department, and
some courts, with regard to whether the alleged breach caused a loss to
the plan. See, e.g., Pizarro v. Home Depot, 111 F.4th 1165 (11th Cir.
2024); Pioneer Ctrs. Holding Co. Emp. Stock Ownership Plan & Trust v.
Alerus Fin., N.A., 858 F.3d 1324, 1336 (10th Cir. 2017) (rejecting
burden-shifting as to causation of loss), petition for cert. dismissed,
585 U.S. 1056 (2018). Consequently, a defendant fiduciary that complies
with the proposed regulation's safe harbor factors should, to that
extent, be confident that it has fulfilled its fiduciary duty of
prudence. And given where the burden lies, a fiduciary that can
actively demonstrate that compliance should be able to confidently rely
on it to successfully defend its actions.
Some courts have even suggested that, under an extension of
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), fiduciaries
should receive deference for their investment determinations or other
decisions (in addition to the decisions regarding benefit claims that
were at issue in Firestone), if they are exercising discretion in
interpreting and applying plan terms. For example, in Tussey v. ABB,
Inc., 746 F.3d 327 (8th Cir. 2014), the Eighth Circuit found that there
is ``no compelling reason to limit Firestone deference to benefit
claims,'' and thus held that the district court should have applied a
``deferential standard of review in evaluating whether the [plan]
fiduciaries, at the time they made their investment decisions, breached
their fiduciary duties in . . . . . . evaluating and selecting Plan
investment options in accordance with the Plan,'' and the investment
policy statement. Id. at 335, 338; see also Armstrong v. LaSalle Bank
Nat. Ass'n, 446 F.3d 728, 733 (7th Cir. 2006) (finding that the
standard of review for ``a decision that involves a balancing of
competing interests under conditions of uncertainty,'' such as an ESOP
redemption price valuation, is abuse of discretion); Hunter v. Caliber
Sys., Inc., 220 F.3d 702, 711 (6th Cir. 2000) (finding ``no barrier to
application of the arbitrary and capricious standard in a case such as
this not involving a typical review of denial of benefits,'' but rather
interpretation of a plan term regarding lump sum payments).
To further assist plan fiduciaries, the Department is proposing
this regulation with safe harbors. The Department has clear statutory
authority under ERISA section 505 to promulgate safe harbors, including
safe harbors regarding the fiduciary duty of prudence (such as, for
example, the selection of annuity providers under 29 CFR 2550.404a-4).
Cf. McNeil v. Time Ins. Co., 205 F.3d 179, 190 (5th Cir. 2000)
(``ERISA's section 505 granted the Secretary of Labor the authority to
promulgate regulations for implementation of ERISA, and the Secretary
has created an exemption for certain group or group-type insurance
programs from the scope of ERISA.'' (citations and footnotes omitted)).
The Departmental explication of a prudent process is entitled to
Skidmore deference (Skidmore v. Swift & Co., 323 U.S. 134 (1944)) as
persuasive authority regarding what constitutes a prudent process.
Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024). Loper-Bright
cites Skidmore with approval. Id. at 402. Other courts have adhered to
this principle. See, e.g., Lopez v. Garland, 116 F.4th 1032, 1039 (9th
Cir. 2024) (agency interpretation entitled to due respect when well-
reasoned). And while the Fifth Circuit has questioned the continuing
role of Skidmore, see Mayfield v. United States Dep't of Labor, 117
F.4th 611, 619 (5th Cir. 2024), the Fifth Circuit implied that to the
extent Skidmore has weight, it is when the Department has clear
statutory authority and has exercised it consistently. Here, the
Department has promulgated safe harbors regarding a prudent process in
the past (e.g., selection of annuity providers), and the prudent
process described herein is consistent with both the balance of
existing caselaw and past Departmental practice. Accordingly, this
regulation should carry persuasive weight to courts under Skidmore such
that fiduciaries that comply with the regulation should be found to
have followed a prudent process with the result that their judgment
with regard to the particular factor at issue (including the
relationship of that factor to the other factors) is respected.

3. Executive Order 14330

3.1. Section 3(c)

On August 7, 2025, President Trump issued Executive Order E.O.
14330, Democratizing Access to Alternative Assets for 401(k)
Investors.\19\ The Executive Order (E.O. 14330) pointed out that,
currently, many Americans in employer-sponsored defined contribution
plans do not have the opportunity to participate in the potential
growth and diversification opportunities offered by alternative asset
investments. E.O. 14330 cited regulatory burdens and litigation risk as
factors that may impede access to these investments. E.O. 14330 stated
it is the policy of the United States that ``every American preparing
for retirement should have access to funds that include investments in
alternative assets when the relevant plan fiduciary determines that
such access provides an appropriate opportunity for plan participants
and beneficiaries to enhance the net risk-adjusted returns on their
retirement assets.''
---------------------------------------------------------------------------

\19\ 90 FR 38921 (August 12, 2025).
---------------------------------------------------------------------------

E.O. 14330 contains a definition of alternative assets which
includes the following:
<bullet> private market investments, including direct and indirect
interests in equity, debt, or other financial instruments that are not
traded on public exchanges, including those where the managers of such
investments, if applicable, seek to take an active role in the
management of such companies;
<bullet> direct and indirect interests in real estate, including
debt instruments secured by direct or indirect interests in real
estate;
<bullet> holdings in actively managed investment vehicles that are
investing in digital assets;
<bullet> direct and indirect investments in commodities;
<bullet> direct and indirect interests in projects financing
infrastructure development; and
<bullet> lifetime income investment strategies including longevity
risk-sharing pools.
Alternative assets are highly varied, as the executive order
demonstrates, and

[[Page 16093]]

alternatives include nearly all investments other than those typically
considered to be ``traditional'' asset classes--i.e., publicly-traded
stocks, bonds and cash. Alternative assets sometimes are less liquid
and harder to value than traditional asset classes, and the fee
structures for alternative investments are often more sophisticated and
performance-driven than for traditional investments.
For example, private market investments are often set up as
partnerships in which a general partner manages money on behalf of
limited partners, with a 10-year commitment before the limited partners
expect to see a return of their capital and any profits. These private
investment structures can help limited partners diversify their
portfolios, but such diversification sometimes comes with reduced day-
to-day insight into the value of their investments than investments in
traditional assets. These partnerships may also use private debt, which
generally refers to direct lending to private entities, often with
customized structures to meet the specific needs of the borrower or
other financial investments.
Real estate may include land, buildings, or natural resources such
as timberland and farms. No two properties are the same, and valuation
must take this into account in contrast to market-traded stocks or
bonds.
Digital assets are a new form of investing that includes a wide
variety of assets that can be stored and transmitted digitally,
including cryptocurrencies such as Bitcoin and other tokens.
Commodities, ranging from metals to corn, do not generate any cash,
but allow investors to benefit from price increases or to hedge other
investments. Commodity investments are often operationalized with
derivatives (contracts based on the price of an underlying asset) to
avoid the actual cost of storing physical commodities.
Infrastructure investments include everything from water treatment
plants to airports to highways and may be considered a type of real
estate investment.
Lifetime income investment strategies are designed to provide
individuals with a predictable stream of income for their lives, and
have sometimes been referred to as a form of monthly paycheck during
retirement. A typical example of a lifetime income solution is an
annuity. The Department has also added guidance on lifetime income
longevity-sharing pools, which are a risk-sharing mechanism that can
incorporate many investment strategies, rather than itself constituting
an alternative asset.
Section 3(c) of E.O. 14330 directed the Department to propose
regulations or other guidance, including appropriately calibrated safe
harbors, that clarify the ERISA fiduciary duties owed to plan
participants when asset allocation funds with investments in
alternative assets are made available as investment options.\20\ In
carrying out E.O. 14330's directives, the Department is to prioritize
approaches that are designed to curb litigation risk that may constrain
fiduciaries from applying their best judgment in offering investment
opportunities to plan participants.\21\
---------------------------------------------------------------------------

\20\ Consistent with paragraph (d) of section 3 of the Executive
Order, the Department consulted with the Department of the Treasury,
the staff of the Securities and Exchange Commission (the ``SEC''),
and the Pension Benefit Guaranty Corporation in developing this
proposed regulation.
\21\ The Executive Order also directed the Department to
reexamine its existing guidance regarding ERISA fiduciary duties
owed to plan participants when making available asset allocation
funds with alternative assets, and consider rescinding the December
21, 2021, Supplemental Private Equity Statement, discussed above.
---------------------------------------------------------------------------

3.2. Application of Executive Order 14330 to Selection of Designated
Investment Alternatives

Although E.O. 14330 directed the Department to focus guidance on
fiduciary responsibilities in connection with offering an asset
allocation fund that includes investments in alternative assets, the
Department has decided not to limit the proposed rule to such funds.
While the proposed regulation does provide the exact guidance
contemplated by E.O. 14330, providing guidance only with respect to
those asset allocation funds that invest in alternative assets could
create the impression that those asset allocation funds are either
favored or disfavored. They are not. They are subject to the same
requirements as any other investment. This is consistent with the
Department's historical practice of providing neutral guidance that
does not favor or disfavor any particular type of investment or
investment strategy. The Department therefore has decided to address in
this proposal ERISA's fiduciary duty of prudence with respect to the
selection of any designated investment alternative, as discussed in
more detail below. That said, the Department expects that by focusing
on the factors and examples--often in the context of the selection of
alternative assets--described more below, the Department has fully
addressed E.O. 14330, showing how a good fiduciary process can justify
and support the discretionary investment decisions of plan fiduciaries,
including when they choose to select asset allocation funds that
contain alternative assets.

4. Detailed Discussion of the Proposed Regulation

4.1. Scope--Proposed Paragraphs (a) and (b)

The scope of this proposed regulation is delineated in paragraphs
(a) and (b). These provisions collectively limit the proposed
regulation's applicability to ERISA's duty of prudence, specifically as
it pertains to a plan fiduciary's selection of a designated investment
alternative within a participant-directed individual account plan.
Paragraph (a) of the proposed regulation recites the duty of
prudence as set forth in the statute. In relevant part, it provides
that a fiduciary shall discharge its duties with respect to the plan
with the care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent person 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.
Paragraph (b) of the proposed regulation sets forth the
Department's longstanding position that the selection of a designated
investment alternative for a participant-directed individual account
plan is a fiduciary act.\22\ Paragraph (b) also clarifies that such a
selection is governed by ERISA's duty of prudence as set forth in
paragraph (a) of the proposed regulation. As described in detail in
section 11 of this preamble, the term ``designated investment
alternative'' refers generally to the investment options on the plan's
menu chosen by a plan fiduciary and available to participants and
beneficiaries for investment of their retirement benefits.
---------------------------------------------------------------------------

\22\ See, e.g., Employee Benefits Security Administration,
Fiduciary Requirements for Disclosure in Participant-Directed
Individual Account Plans, (codified at 29 CFR 2550.404a-5(f))
(``Nothing herein is intended to relieve a fiduciary from its duty
to prudently select and monitor providers of services to the plan or
designated investment alternatives offered under the plan.'').
---------------------------------------------------------------------------

The proposed regulation does not address ERISA's well-established
duty for fiduciaries to monitor designated investment options at
regular intervals after their selection. In Hughes v. Northwestern
University,\23\ the Supreme Court unanimously affirmed that ERISA
fiduciaries have a continuing obligation to monitor all plan
investments--not just a subset--and to remove options that the
fiduciary determines, after a rigorous process, are no longer
appropriate. The Court clarified that offering a broad menu of
investment

[[Page 16094]]

choices does not excuse fiduciaries from breaches if some options are
poorly managed. The Department anticipates issuing interpretive
guidance in the near term concerning fiduciary obligations under ERISA
to monitor designated investment alternatives following their inclusion
on a plan's investment menu. The Department generally is of the view
that the factors and processes (or substantially similar factors and
processes) outlined in the proposed regulation--including the
illustrative safe harbor examples--apply to this ongoing duty. Put
differently, a plan fiduciary that tracks the process in the proposed
regulation during appropriately established monitoring cycles will meet
ERISA's monitoring requirements. Accordingly, the Department invites
commenters, particularly those with expertise in portfolio monitoring
and menu maintenance, and fiduciary standards, to provide input on best
practices in this area.
---------------------------------------------------------------------------

\23\ Hughes v. Nw. Univ., 595 U.S. 170, 176 (2022).
---------------------------------------------------------------------------

4.2. Fiduciaries Have Maximum Discretion to Select Investments to
Further the Purposes of the Plan--Proposed Paragraph (c)

Paragraph (c) of the proposed regulation addresses the question of
whether any designated investment alternative is per se prudent or
imprudent under section 404(a)(1)(B) of ERISA. The text of section
404(a)(1)(B) of ERISA is plainly neutral to types or classes of
designated investment alternatives that a fiduciary selects for the
plan menu, so long as the fiduciary's selection process adheres to
section 404(a)(1)(B)'s articulated standard of care.\24\ Thus, plan
fiduciaries have maximum discretion to select investments to further
the purposes of the plan. Paragraph (c) of the proposed regulation
adopts this foundational principle, providing, in relevant part, that
section 404(a)(1)(B) of ERISA ``does not require or restrict any
specific type of designated investment alternative.'' \25\ However, the
investment discretion ERISA confers on plan fiduciaries is not a
license to ignore other applicable laws. Paragraph (c) of the proposed
regulation reflects this basic principle by clarifying that maximum
discretion notwithstanding, a plan fiduciary is prohibited from
selecting a designated investment alternative that is otherwise
illegal. For example, as paragraph (c) of the proposed regulation
clarifies, an investment in a foreign adversary which violates the
Specially Designated Nationals and Blocked Persons List administered by
the Office of Foreign Assets Control of the United States Department of
the Treasury is not permitted.\26\
---------------------------------------------------------------------------

\24\ See Uniform Prudent Investor Act Sec. 2(e) (Nat'l
Conference of Comm'rs on Unif. State Laws 1995) (clarifying ``that
no particular kind of property or type of investment is inherently
imprudent''); see also Restatement (Third) of Trusts Sec. 90,
comment f(2) (Am. L. Inst. 2007).
\25\ Paragraph (c) also makes clear, for example, that there is
no per se rule respecting the inclusion of actively managed
investment vehicles that are investing in digital assets. In this
regard, the Department recently announced a return to its
historically neutral position with respect to particular investment
types and strategies which neither endorses, nor disapproves of,
plan fiduciaries that conclude that the inclusion of cryptocurrency
in a plan's investment menu is appropriate. See U.S. Dep't of Labor,
Employee Benefits Security Admin., Compliance Assistance Release
2025-01, 401(k) Plan Investments in ``Cryptocurrencies'' (May 28,
2025), <a href="https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/compliance-assistance-releases/2025-01">https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/compliance-assistance-releases/2025-01</a>. The Compliance Assistance Release rescinded previous
guidance issued by the Department in 2022 that directed plan
fiduciaries to exercise ``extreme care before they consider adding a
cryptocurrency option to a 401(k) plan's investment menu for plan
participants.''
\26\ See also U.S. Dep't of Labor, Employee Benefits Security
Admin., Advisory Opinion 25-01A (July 21, 2025) (ERISA does not
shield fiduciaries from the application of the civil rights laws),
<a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2025-01a">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2025-01a</a>.
---------------------------------------------------------------------------

4.3. Fiduciaries Have a Duty To Act Prudently When Establishing a Plan
Investment Menu to Maximize Risk-Adjusted Returns--Proposed Paragraph
(d)

Paragraph (d) of the proposed regulation provides that a fiduciary
with responsibility or authority for selecting designated investment
alternatives has a duty to act prudently also when establishing a
diversified menu of designated investment alternatives to further the
purposes of the plan by enabling participants and beneficiaries in such
plans to maximize risk-adjusted returns on investment, net of fees,
across their entire portfolio. This in turn allows participants with
different risk capacities to maximize their returns for a given level
of risk. This provision is intended to serve as an important reminder
that each designated investment alternative selected by a plan
fiduciary plays a role in the larger investment menu and the fiduciary
has a duty to prudently curate the menu of investments overall.\27\ Put
differently, ERISA's duty of prudence applies not just to the selection
of each designated investment alternative but also to the collection of
designated investment alternatives as a whole--i.e., to both the
individual parts and the sum.
---------------------------------------------------------------------------

\27\ 29 CFR 2550.404a-1(b)(1) (stating that the duty of prudence
is satisfied if the fiduciary has given ``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 or investment course of
action involved, 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 . . . [h]as acted accordingly'' (emphasis added)).)).
---------------------------------------------------------------------------

While, as explained in the scope discussion above, the focus of the
proposed regulation is on the application of the duty of prudence to a
fiduciary's selection of an individual designated investment
alternative for a plan's menu, the proposed regulation does not address
the question of how to prudently curate a menu of investments overall.
This question is beyond the scope of this proposed regulation. In this
regard, the Department understands that, to obtain the fiduciary relief
available under section 404(c) of ERISA, many participant-directed
individual account plans establish menus that seek to comply with the
requirements of regulations implementing section 404(c) of ERISA.\28\
These regulations, which are optional, generally require the menu to
offer a broad range of investment alternatives that meets specified
diversification and risk and return requirements.\29\ Comments are
solicited on whether future guidance should address the question of
what process is required to curate a prudent menu of investments
overall or whether the requirements of the regulations implementing
section 404(c) continue to be best practice.
---------------------------------------------------------------------------

\28\ 29 CFR 2550.404c-1. A plan fiduciary is not liable for the
direct consequences of the investment decisions of plan participants
if the fiduciary ensures compliance with this regulation.
\29\ Id. at (b)(3).
---------------------------------------------------------------------------

4.4. Prudence Requires Appropriate Consideration of All Relevant
Factors--Proposed Paragraph (e)

Paragraph (e) of the proposed regulation sets forth the general
standard of what prudence requires when selecting a designated
investment alternative. In relevant part, it provides that to satisfy
the duty of prudence when selecting a designated investment
alternative, the plan fiduciary must follow a prudent process under
which it gives appropriate consideration to those facts and
circumstances that, given the scope of such fiduciary's investment
responsibility or authority, the fiduciary knows or should know are
relevant to the particular designated investment alternative. This
provision mirrors language in paragraph (b)(1) of the 1979 Investment
Duties Regulation. Paragraph (e) of the proposed regulation does not,
however, contain the ``and act accordingly'' language that is in

[[Page 16095]]

paragraph (b)(1)(ii) of the Investment Duties Regulation. In lieu of
the ``and act accordingly'' language, paragraphs (g) through (l) of the
proposed regulation set forth six relevant factors and safe harbor
examples demonstrating what it means for a fiduciary to ``act
accordingly''--and therefore to be prudent--in the circumstances
addressed in the examples. Thus, the proposed regulation supplements
and expands on the Investment Duties Regulation in the context of
selecting designated investment alternatives for participant-directed
individual account plans, especially with respect to the six enumerated
factors and related safe harbor examples. Further, like many safe
harbor examples in the proposed regulation, paragraph (e) of the
proposed regulation reinforces the idea that it also may be appropriate
for the named fiduciary to enlist the services of professional
advisors, to carry out the necessary objective, thorough, and
analytical analysis.
Importantly, paragraph (e) of the proposed regulation makes clear
that nothing in the proposed regulation excuses a fiduciary from
complying with its obligations to act loyally or avoid prohibited
conflicts of interest under sections 404(a)(1)(A) or 406 of ERISA
respectively. Those are separate requirements, not impacted by the
proposed regulation. For the avoidance of doubt, the Department does
not intend to relax the loyalty requirement or waive any conflict
prohibitions in relation to a fiduciary evaluation of alternative
assets.

4.5. Safe Harbor--Paragraph (f)

E.O. 14330 emphasizes that burdensome lawsuits challenging
reasonable decisions made by ERISA plan fiduciaries may inhibit
fiduciaries' ability to make sound judgments when offering investment
opportunities to plan participants and beneficiaries. This, in turn,
hinders American workers' ability to achieve competitive and
diversified accounts, affecting their chances of securing a comfortable
and dignified retirement. Consequently, E.O. 14330 instructs the
Department to prioritize efforts in developing rules, regulations, or
guidance aimed at reducing such litigation that constrains fiduciaries'
ability to apply their best judgment in offering investment
opportunities to plan participants and beneficiaries.
Following the issuance of E.O. 14330, several stakeholders
submitted letters to the Department. They expressed their support for
the E.O. 14330's focus on reducing excessive litigation. The
stakeholders noted a significant increase in class-action lawsuits over
the past decade and anticipated even more, especially in light of the
Supreme Court's decision in Cunningham v. Cornell University.\30\
---------------------------------------------------------------------------

\30\ Letter from American Retirement Ass'n et al. to Lori
Chavez-DeRemer, Sec'y of Labor (Dec. 4, 2025) (alleging that from
2016 through 2024, plaintiffs' attorneys filed more than 500 ERISA
``fee cases,'' and that filings are expected to almost double from
53 new lawsuits in 2024 to an estimated 99 new lawsuits in 2025) 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 v. 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 v. 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 v. 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).\31\
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.\32\
Ultimately, this situation jeopardizes the long-term retirement
security of ERISA plan participants.\33\
---------------------------------------------------------------------------

\31\ 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. v. 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.
\32\ Am. Ret. Ass'n et al., supra note 30; Am. Benefits Council
supra note 30.
\33\ Lawsuits have a ``tremendous power to harass'' individual
fiduciaries, Cunningham v. 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 v. Dudenhoeffer, 573 U.S. 409, 424 (2014), or on a
``razor's edge,'' Armstrong v. 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 (l) 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 (l) 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. v.
Bruch.\34\
---------------------------------------------------------------------------

\34\ See Firestone Tire & Rubber Co. v. 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 Sec. 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-

[[Page 16096]]

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.\35\
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\35\ See Anderson v. 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.\36\
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\36\ See Pizarro v. 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'').
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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

[[Page 16097]]

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.\37\
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\37\ 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 v. CommonSpirit Health, 37 F.4th 1160 (6th Cir. 2022),
Forman v. TriHealth, Inc., 40 F.4th 443, 449 (6th Cir. 2012), Hecker
v. 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.\38\ 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.\39\
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\38\ See Anderson v. 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).
\39\ 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 v. 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 v.
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. v. 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)).

---------------------------------------------------------------------------

[[Page 16098]]

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.\40\
---------------------------------------------------------------------------

\40\ See, e.g., Smith v. CommonSpirit Health, 37 F. 4th 1160
(6th Cir. 2022); Davis v. 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.\41\ 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.
---------------------------------------------------------------------------

\41\ See Barchock v. 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 v. 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.\42\ 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.\43\ 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

[[Page 16099]]

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.
---------------------------------------------------------------------------

\42\ 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.
\43\ 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

[[Page 16100]]

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.\44\ 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.\45\
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\44\ See, e.g., Fifth Third Bancorp. v. Dudenhoeffer, 573 U.S.
409, 426-27 (``ERISA fiduciaries . . . may, as a general matter,
likewise prudently rely on the market price.'').
\45\ See Amgen Inc. v. 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)).
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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.\46\
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.
---------------------------------------------------------------------------

\46\ 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'').
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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'').\47\ 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

[[Page 16101]]

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.
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\47\ 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)).
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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.\48\
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\48\ See, e.g., Matney v. Barrick Gold, 80 F.4th 1136, 1149
(10th Cir. 2023) (describing the need for ``an apples-to-apples
comparison''); Matousek v. MidAmerican Energy Co., 51 F.4th 274, 278
(8th Cir. 2022) (describing the need for a ``meaningful
benchmark''); Davis v. 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.'' \49\ 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.
---------------------------------------------------------------------------

\49\ See, e.g., Matney v. Barrick Gold, 80 F.4th 1136, 1148
(10th Cir. 2023); Meiners v. 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 v. 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 v. 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.
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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.\50\
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\50\ 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,

[[Page 16102]]

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 (l) 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.\51\
---------------------------------------------------------------------------

\51\ 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 <a href="http://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/information-letters/03-21-1996">www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/information-letters/03-21-1996</a>)).
---------------------------------------------------------------------------

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.\52\
---------------------------------------------------------------------------

\52\ 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 (l), a plan fiduciary must seek
assistance from a qualified investment advice fiduciary,

[[Page 16103]]

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 v. All. Holdings, Inc., 886 F. Supp. 2d 1007, 1041-42 (W.D.
Wis. 2012), aff'd sub nom. Chesemore v. 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 v. Minn. Mining & Mfg. Co., 42 F. Supp. 2d 898, 907
(D. Minn. 1999), aff'd sub nom. Harley v. 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 v. 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 (l)(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 (l)(1) addresses the fiduciary's
obligation to understand the complex fees that will be charged to the
plan.
The example in proposed paragraph (l)(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 (l)(2) relates to complexity in the area of
participant needs and illustrates an example that would not satisfy
paragraph (l) 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.\53\ 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).\54\ 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

[[Page 16104]]

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.\55\
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\53\ See e.g., proposed paragraph (l)(2) discussing application
of the proposal to a qualified default investment alternative that
is a managed account service.
\54\ Field Assistance Bulletin No. 2012-02R, Q27, <a href="https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2012-02r">https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2012-02r</a>.
\55\ 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.'').
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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.\56\
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\56\ 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,\57\ Executive Order 12866,\58\ the Paperwork
Reduction Act of 1995,\59\ the Regulatory Flexibility Act,\60\ section
202 of the Unfunded Mandates Reform Act,\61\ Executive Order 13132,\62\
and Executive Order 14192.\63\
---------------------------------------------------------------------------

\57\ 76 FR 3821 (Jan. 21, 2011).
\58\ 58 FR 51735 (Oct. 4, 1993).
\59\ 44 U.S.C. 3506(c)(2)(A) (1995).
\60\ Public Law 96-354, 94 Stat. 1164 (1980).
\61\ Public Law 104-4, 109 Stat. 48 (1995).
\62\ 64 FR 43255 (Aug. 9, 1999).
\63\ 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.\64\
This Executive Order requires the Department to:
---------------------------------------------------------------------------

\64\ 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

[[Page 16105]]

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.\65\
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\65\ 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), <a href="https://www.americanbenefitscouncil.org/pub/?id=80095a3f-cbb8-e46c-854f-a475d2c68358">https://www.americanbenefitscouncil.org/pub/?id=80095a3f-cbb8-e46c-854f-a475d2c68358</a>.
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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.\66\ 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,'' \67\ and
that ``a fiduciary need not take a particular investment course to meet
the prudent person standard.'' \68\ 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.\69\
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\66\ Vahick A. Yedgarian & Ram Paudel, Quantitative Analysis of
Damages in ERISA Fiduciary Breach Litigation, Fin. & Inv. Plan.
Educator eJournal 1 (Sept. 9, 2025), <a href="https://dx.doi.org/10.2139/ssrn.5461234">https://dx.doi.org/10.2139/ssrn.5461234</a>.
\67\ Brief for Encore Fiduciary as Amicus Curiae at 2, Parker-
Hannifin Corp. v. Johnson, No. 24-1030 (U.S. May 21, 2025).
\68\ Jenner & Block, Practice Series: ERISA Litigation Handbook
334 (2021), <a href="https://www.jenner.com/a/web/tq6i81QxHmqcsmUPMXCWp5/4k1Xkb/Jenner%20%26%20Block%20-%20ERISA%20Litigation%20Handbook%20">https://www.jenner.com/a/web/tq6i81QxHmqcsmUPMXCWp5/4k1Xkb/Jenner%20%26%20Block%20-%20ERISA%20Litigation%20Handbook%20</a>(Final%20Version%20-%202021).pdf.
\69\ Brief for Encore Fiduciary as Amicus Curiae at 22-23,
Parker-Hannifin Corp. v. Johnson, No. 24-1030 (U.S. May 21, 2025).
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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.\70\
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\70\ 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), <a href="https://doi.org/10.1016/j.jfineco.2018.11.007">https://doi.org/10.1016/j.jfineco.2018.11.007</a>.
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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.\73\ 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.
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\71\ 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.
\72\ 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), <a href="https://crr.bc.edu/public-pension-investment-update-have-alternatives-helped-or-hurt/">https://crr.bc.edu/public-pension-investment-update-have-alternatives-helped-or-hurt/</a>.
\73\ Mercedes Aguirre & Brendan McFarland, 2023 Asset
Allocations in Fortune 1000 Pension Plans, Insider, Vol. 35, No. 2
(Feb. 2025), <a href="http://www.wtwco.com/-/media/wtw/insights/2025/02/wtw-insider-2023-asset-allocations-in-fortune-1000-pension-plans.pdf?modified=20250225111427">www.wtwco.com/-/media/wtw/insights/2025/02/wtw-insider-2023-asset-allocations-in-fortune-1000-pension-plans.pdf?modified=20250225111427</a>.
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In contrast, defined contribution plans are far less likely to hold

[[Page 16106]]

alternative investments, with only 4 percent of defined contribution
plans offering alternative investments in 2024, according to the 2025
PlanSponsor DC Plan Benchmarking Report.\74\ 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.\75\ As a result, only 0.1 percent of all defined
contribution plan assets were in alternative investments in 2024.\76\
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\74\ PlanSponsor, 2025 DC Survey: Plan Benchmarking (Jan. 7,
2025).
\75\ Jessica Johnson, The Democratization of Alternative
Investments in 401(k) Plans, DCIO Insights (June 2022), <a href="https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2022/06/A0704783.pdf">https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2022/06/A0704783.pdf</a>.
\76\ Jessica Hall, Private Equity in 401(k) Plans? Highly Risky
for the Average Investor, MarketWatch (Jan. 11, 2025), <a href="https://www.morningstar.com/news/marketwatch/20250111254/private-equity-in-401k-plans-highly-risky-for-the-average-investor">https://www.morningstar.com/news/marketwatch/20250111254/private-equity-in-401k-plans-highly-risky-for-the-average-investor</a>.
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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.\77\ 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.\78\ 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.''
\79\ 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.
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\77\ Sanja Arya, Breaking Barriers: Redefining Equity Market
Portfolios with Venture Capital, Morningstar Indexes (Nov. 2024),
<a href="https://assets.contentstack.io/v3/assets/bltabf2a7413d5a8f05/blt1aeeccec6ce5e015/6887a00b8c9c0c3eaeb99ee3/Breaking-barriers-Redefining-equity-market-portfolios-w-VC.pdf">https://assets.contentstack.io/v3/assets/bltabf2a7413d5a8f05/blt1aeeccec6ce5e015/6887a00b8c9c0c3eaeb99ee3/Breaking-barriers-Redefining-equity-market-portfolios-w-VC.pdf</a>.
\78\ KKR, An Alternative Perspective: Past, Present and Future,
Insights Global Market Trends (Sept. 2024), <a href="https://www.kkr.com/content/dam/kkr/insights/pdf/2024-september-an-alternative-perspective.pdf">https://www.kkr.com/content/dam/kkr/insights/pdf/2024-september-an-alternative-perspective.pdf</a>.
\79\ Council of Econ. Advisers, Retail Access to Alternative
Investments Via Defined Contribution Plans (Aug. 2025), <a href="https://www.whitehouse.gov/research/2025/08/retail-access-to-alternative-investments-via-defined-contribution-plans/">https://www.whitehouse.gov/research/2025/08/retail-access-to-alternative-investments-via-defined-contribution-plans/</a>. ``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''.
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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.'' \80\ 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.'' \81\ 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.'' \82\ This development has raised concerns
that plans may be avoiding more novel investment options that could
improve participant outcomes because of potential litigation risk.\83\
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\80\ 90 FR 38921 (Aug. 7, 2025).
\81\ Vahick A. Yedgarian & Ram Paudel, Quantitative Analysis of
Damages in ERISA Fiduciary Breach Litigation, Fin. & Inv. Plan.
Educator eJournal 1 (Sept. 9, 2025), <a href="http://dx.doi.org/10.2139/ssrn.5461234">http://dx.doi.org/10.2139/ssrn.5461234</a>.
\82\ Am. Benefits Council, The Proliferating Risk of Baseless
Retirement Plan Litigation is Harming Plan Participants and
Retirement Security (Oct. 2, 2025), <a href="https://www.americanbenefitscouncil.org/pub/?id=80095a3f-cbb8-e46c-854f-a475d2c68358">https://www.americanbenefitscouncil.org/pub/?id=80095a3f-cbb8-e46c-854f-a475d2c68358</a>.
\83\ 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), <a href="https://bit.ly/2Sl55Yq">https://bit.ly/2Sl55Yq</a>. ``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),
<a href="https://bit.ly/3fUxDR1">https://bit.ly/3fUxDR1</a>. Now fiduciaries overwhelmingly choose
purportedly ```safe' funds over those that could add greater
value.'' Id.
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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.\84\ As documented in its brief for the Parker-Hannifin
Corp. v. 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.'' \85\ 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.'' \86\ 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.\87\
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\84\ CHUBB, A Surprise Twist in ERISA Class Action Trends in
2024 (May 2025), <a href="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</a>.<a href="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</a>.
\85\ Brief for Encore Fiduciary as Amicus Curiae, Parker-
Hannifin Corp. v. Johnson, No. 24-1030 (U.S. May 21, 2025).
\86\ CHUBB, A Surprise Twist in ERISA Class Action Trends in
2024 (May 2025), <a href="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</a>.
\87\ CHUBB, A Surprise Twist in ERISA Class Action Trends in
2024 (May 2025), <a href="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</a>.
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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.\88\
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\88\ Brief for Encore Fiduciary as Amicus Curiae, Parker-
Hannifin Corp. v. 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

[[Page 16107]]

between $2 and $4 million as well as $2 million in experts' fees.\89\
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\89\ CHUBB, Excessive Litigation Over Excessive Plan Fees in
2023 (2023), <a href="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">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</a>.
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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.'' \90\ 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.'' \91\
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\90\ CHUBB, Excessive Litigation Over Excessive Plan Fees in
2023 (2023),), <a href="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">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</a>.
\91\ Cunningham v. Cornell Univ., 604 U.S. 693, 710 (2025)
(Alito, J., concurring).
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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.'' \92\ As noted in Dura Pharmaceuticals,
Inc. v. 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.' '' \93\ CHUBB
estimates that one-third of settlements go to attorneys' fees.\94\
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\92\ Id. at 711; see also Pension Benefit Guar. Corp. ex rel.
St. Vincent Catholic Med. Ctrs. Ret. Plan v. Morgan Stanley Inv.
Mgmt. Inc., 712 F.3d 705, 719 (2d Cir. 2013).
\93\ 544 U.S. 336, 347 (2005) (second alteration in original).
\94\ CHUBB, A Surprise Twist in ERISA Class Action Trends in
2024 (May 2025), <a href="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</a>.
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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.\95\ Compounding this problem, insurers have
raised premiums and retentions because they are struggling to build
underwriting models that predict litigation exposure.\96\ In its brief
for the Parker-Hannifin Corp. v. Johnson appeal, Encore Fiduciary noted
an increase in retentions ``from $1 million to as high as $15 million
for many policies.'' \97\ 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.\98\ 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.
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\95\ Fid Guru Blog, Has ERISA Class Action Litigation Made a
Positive Difference for Plan Participants? (Oct. 31, 2023), <a href="https://encorefiduciary.com/has-erisa-class-action-litigation-made-a-positive-difference-for-plan-participants/">https://encorefiduciary.com/has-erisa-class-action-litigation-made-a-positive-difference-for-plan-participants/</a>.
\96\ Ed. Antonucci, CRC GROUP, Surge in Excessive Fee Litigation
is Impacting Fiduciary Liability Insurance (March. 2021),
<a href="http://www.crcgroup.com/Portals/34/Flyers/Tools-Intel/Fiduciary%20Liability%20Excess%20Fee%20Litigation.pdf?ver=2021-03=19-133939-113">www.crcgroup.com/Portals/34/Flyers/Tools-Intel/Fiduciary%20Liability%20Excess%20Fee%20Litigation.pdf?ver=2021-03=19-133939-113</a>.
\97\ Brief for Encore Fiduciary as Amicus Curiae, Parker-
Hannifin Corp. v. Johnson, No. 24-1030 (U.S. May 21, 2025).
\98\ Id.
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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.\99\ 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\
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\99\ Michael Gropper, Lawyers Setting the Menu: The Effects of
Litigation Risk on Employer-Sponsored Retirement Plans (Aug. 2025),
<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4393420">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4393420</a>.
\100\ Id.
\101\ Id.
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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 investments for their menus.
In turn, this will expand the universe of potential investment vehicles
considered when choosing designated investment alternatives and
potentially enhance the retirement security of participants and
beneficiaries.

12.3. Regulatory Baseline

The obligations of a fiduciary when considering an investment or
investment course of action are outlined in the 1979 Investment Duties
Regulation. Specifically, for a decision to be deemed prudent, a
fiduciary must

[[Page 16108]]

give appropriate consideration to all facts and circumstances that the
fiduciary knows or should know are relevant to the particular
investment decision involved. Such factors include risk return,
diversification, and liquidity, among others. The fiduciary must then,
using all such relevant factors, determine whether the investment is
reasonably designed to further the purposes of the plan before adopting
it.
The Department has previously stated that it interprets ERISA
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. In
particular, the statute does not require or restrict any specific type
of designated investment alternative, except insofar as a designated
investment alternative might be otherwise illegal. The Department has
at times, however, provided additional guidance relating to
considerations fiduciaries should apply under this process towards
certain investment vehicles.
12.3.1. 2020 Guidance
On June 3, 2020, the Department issued an information letter
responding to an inquiry concerning the use of private equity
investments within professionally managed asset allocation funds that
are designated investment alternatives for participant-directed
individual accounts.\102\ Specifically, the party wished to offer
private equity investments as part of a multi-asset class vehicle
structured as a custom target date, target risk, or balanced fund and
asked if such an investment satisfies the requirements set forth in
sections 403 and 404 of ERISA. In its response, the Department
acknowledged that plan fiduciaries could offer such a product, but
noted that the evaluation process for fiduciaries to include an asset
allocation fund with a private equity component as part of the
investment lineup for a participant-directed individual account plan is
different than that for including private equity investments in the
portfolio of a professionally managed defined benefit plan.
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\102\ U.S. Dep't of Labor, Employee Benefits Security Admin.,
Information Letter 06-03-2020, (June 2020), <a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020</a>.
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In particular, the Department outlined a framework to evaluate
whether a particular investment option satisfies the requirements set
forth in sections 403 and 404 of ERISA. Defined contribution plan
fiduciaries were directed to consider the fund's management and design
and whether they are consistent with the characteristics and needs of
plan participants. Such considerations include: strategy; fees and
other expenses, and the nature and duration of any liquidity
restrictions; the participants' and beneficiaries' ability to access
funds in their accounts (e.g., loans, and separation); and their
ability to potentially change investment selections on a frequent
basis. In general, to make such a selection, the Department concluded
``the fiduciary must engage in an objective, thorough, and analytical
process that compares the asset allocation fund with appropriate
alternative funds that do not include a private equity component,
anticipated opportunities for investment diversification and enhanced
investment returns, as well as the complexities associated with the
private equity component.'' \103\ The Department stated at the time
that the letter, ``should assure defined contribution plan fiduciaries
that private equity may be part of a prudent investment mix and a way
to enhance retirement savings and investment security for American
workers.'' \104\
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\103\ Id.
\104\ Id.
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12.3.2. 2021 Guidance
In December 2021, the Department issued a supplemental statement,
clarifying its interpretation of the June 2020 Information Letter. The
statement noted that the Information Letter did not endorse or
recommend the use of private equity investments in defined contribution
plans, but rather highlighted issues surrounding these investments that
can complicate their inclusion in individual account menus. The
Department additionally stated, in response to questions from
stakeholders following the letter's publication as well as a ``Risk
Alert'' issued by the staff of the Securities and Exchange Commission's
Office of Compliance Inspections and Examinations regarding compliance
issues in examinations of registered investment advisers that manage
private fund assets,\105\ that ``it should supplement the Information
Letter to ensure that plan fiduciaries do not expose plan participants
and beneficiaries to unwarranted risks by misreading the letter as
saying that [private equity]--as a component of a designated investment
alternative--is generally appropriate for a typical 401(k) plan.''
\106\ In particular, the Department warned that plan-level fiduciaries
of small, individual account plans are unlikely to have adequate
experience to analyze and evaluate the use of private equity as a
designated investment alternative in these types of plans and
reiterated plan fiduciaries' duties of prudence and loyalty when
selecting and monitoring investment options or service providers.\107\
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\105\ Risk Alert, Observations from Examinations of Investment
Advisers Managing Private Funds, staff of the SEC Off. of Compliance
Inspections & Examinations (June 23, 2020),), <a href="https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf">https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf</a>.
\106\ U.S. Department of Labor Supplement Statement on Private
Equity in Defined Contribution Plan Designated Investment
Alternatives (December 21, 2021), <a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020</a>-supplemental-statementDec.
\107\ U.S. Department of Labor Supplement Statement on Private
Equity in Defined Contribution Plan Designated Investment
Alternatives (December 21, 2021), <a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020</a>-supplemental-statementDec.
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Additionally, in March 2022, the Department issued sub-regulatory
guidance cautioning plan fiduciaries to exercise extreme care before
considering adding an option containing cryptocurrency to a 401(k)
plan's menu.\108\ In the guidance, the Department expressed concerns
related to the prudence of fiduciaries including cryptocurrencies or
other products whose value is tied to cryptocurrencies as investment
options. The Department further warned that ``plan fiduciaries
responsible for overseeing such investment options or allowing such
investments through brokerage windows should expect to be questioned
about how they can square their actions with their duties of prudence
and loyalty in light of the risks described above.'' \109\
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\108\ U.S. Dep't of Labor, Employee Benefits Security Admin.,
Compliance Assistance Release No. 2022-01 (Mar. 10, 2022).
\109\ Compliance Assistance Release No. 2022-01.
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12.3.3. 2025 Guidance
In May 2025, the Department rescinded the 2022 cryptocurrency
guidance, noting that it had imposed a standard of ``extreme care''
which ``is not found in the Employee Retirement Income Security Act
(ERISA) and differs from ordinary fiduciary principles thereunder.''
\110\ By rescinding the prior guidance, the Department reasserted its
position 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, and that, in keeping with the decision from Fifth Third
Bancorp v. Dudenhoeffer, when

[[Page 16109]]

evaluating any particular investment type, a plan fiduciary's decision
should consider all relevant facts and circumstances and will
``necessarily be context specific.'' \111\
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\110\ Compliance Assistance Release No. 2025-01.
\111\ Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 425
(2014).
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The Department subsequently, and in a similar vein, rescinded the
December 2021 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.\112\
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\112\ US Department of Labor Rescinds 2021 Supplemental
Statement on Alternative Assets in 401(k) Plans, <a href="https://www.dol.gov/newsroom/releases/ebsa/ebsa20250812">https://www.dol.gov/newsroom/releases/ebsa/ebsa20250812</a>;see also<a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020</a>-supplemental-statement.
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This current guidance, as well as existing applicable regulations
discussed above in the Preamble, serves as the baseline for this
proposed rule.

12.4. Summary of Impacts

In accordance with OMB Circular A-4, Table 1 depicts an accounting
statement summarizing the Department's assessment of the benefits,
costs, and transfers associated with this regulatory action.
The Department is unable to quantify all benefits, costs, and
transfers of the rulemaking but has sought, where possible, to describe
these non-quantified impacts. The effects in Table 1 reflect non-
quantified impacts and estimated direct monetary costs resulting from
the provisions of the proposed regulation.
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12.5. Request for Comment

The Department invites comments addressing its estimates of the
benefits, costs, and transfers associated with the proposed rulemaking,
as well as any quantifiable data that would support or contradict any
aspect of its analysis. Specifically, the Department requests comments
on:
1. Whether the number of plans using a 3(21) or 3(38) fiduciary
will increase under this proposed rule? If so, will this be for all
plans or only plans of a certain size? How will this impact plan costs?
2. What share of defined contribution plans use off-the-shelf plan
designs with set investment lineups? How does usage vary by plan size?
Do these plans utilize 3(21) or 3(38) fiduciaries?
3. How would the proposed rule change fiduciary litigation? How
would this affect the cost of fiduciary insurance and the scope of
coverage (e.g., lower self-insured retentions)?
4. How would the proposed rule affect how plan fiduciaries consider
including alternative assets? Would they be more likely to include them
in response to this proposal, and if so, in what form (i.e., asset
class, investment vehicle, etc.)?
5. What is the magnitude of financial benefits that will be reaped
in connection with the increased use of alternative assets in products
for defined contribution plans?
6. Are there any quantifiable risks or costs associated with the
increased use of alternative assets in products for defined
contribution plans that are not captured in this regulatory impact
analysis? If yes, what is the magnitude of those risks or costs?
12.6. Affected Entities
The proposed rule would likely affect most participant-directed
defined contribution plans as well as their participants and
beneficiaries, as it broadly describes the factors a plan fiduciary
must consider and make determinations on when selecting designated
investment alternatives for a participant-directed individual account
plan. However, effects on these plans could vary substantially. For
instance, larger plans often use in-house expertise and hire outside
ERISA counsel and investment advisers to provide additional information
regarding investment options as part of their regular selection and
monitoring processes. They would find these costs reduced as they
simplify their processes under the safe harbor. Smaller plans, on the
other hand, often rely on a service provider to design their plan's
menu. In such cases, they likely would not utilize the proposed rule
directly, though they may still be affected by the proposed rulemaking
because many available investment funds would be designed to comply
with the safe harbor. The Department anticipates that many service
providers would also be affected by the proposed rule.
Beyond affecting how plan fiduciaries consider and make
determinations when selecting designated investment alternatives, the
proposed rule and its safe harbor would also result in expanded use of
alternative assets within plan investment menus by clarifying the
process and providing protections associated with the selection of
investment options for participant-directed plans. Plans and
participants who select these investments, and the financial
institutions that develop and sell them, would experience further
impacts from the proposal.
12.6.1. Plans Affected by Reduced Litigation Risk
The Department expects that many plans would benefit from increased
clarity and certainty under the proposed rule by using the safe harbor
it offers. In particular, by detailing an objective, thorough, and
analytical process and means to demonstrate the prudent selection of
investment offerings, the safe harbor would provide added protection
from litigation risk to plan fiduciaries, including through a reduction
in defense costs for frivolous litigation and corresponding lower
fiduciary insurance premiums. In response, plans could reduce
supplementary actions taken to forestall or defend against legal
claims. For instance, plans could reduce costs associated with in-house
staff hours or hiring outside professionals to monitor court cases and
decisions related to investment selection, such as ERISA attorneys and
investment managers.
The Department assumes that some smaller plans use ``off-the-
shelf'' products that include simple, pre-designed menus that they
purchase from a service provider.\113\ In general, plan fiduciaries for
these types of plans likely would not use the safe harbor directly, as
they rely on appointed qualified professionals for expert advice and
recommendations. However, these plans would still be affected by the
proposed rule. As more investment products are developed that comply
with the safe harbor, these plans may adopt them as well. It is also
possible that their 3(21) or 3(38) adviser may modify their fee
structure or recommend changes to their menu because of the overall
market effects resulting from the proposed rule.
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\113\ Elizabeth Harris, No Matter How Small, Businesses Have
Retirement Plan Options, PlanSponsor (Sept. 3, 2024), <a href="https://www.plansponsor.com/in-depth/no-matter-how-small-business-have-retirement-plan-options/">https://www.plansponsor.com/in-depth/no-matter-how-small-business-have-retirement-plan-options/</a>.
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In 2023 there were approximately 721,000 participant-directed
individual account plans, with about 118 million total participants and
more than $8.8 trillion in assets.\114\ The Department assumes that 85
percent of these plans, or about 613,000 plans, rely on service
providers to guide the plan fiduciary.\115\
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\114\ EBSA tabulations based on data from U.S. Dep't of Labor,
EBSA, Private Pension Plan Bulletin Abstract of 2023 Form 5500
Annual Reports, Table D5 (Sept. 3, 2024), <a href="https://www.dol.gov/agencies/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan">https://www.dol.gov/agencies/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan</a>.
\115\ The Department assumes that 85 percent of plans will rely
on service providers to review and act in the new rule. The
remaining 15 percent are assumed to react at the plan level once the
rulemaking is finalized. These estimates are based on 5 years of
data from the PSCA Annual Survey of Profit Sharing and 401(k) Plans,
where an average of roughly 84 percent of surveyed plans (which the
Department rounds to 85 percent) indicated they used outside
advisers to manage fiduciary matters.

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[[Page 16112]]

12.6.2. Plans That Would Hold New Alternative Investments
The Department anticipates that the proposed rule would lead many
individual account plans to adopt new menu options that include
alternative investments. While such assets may appear directly as an
option on the menu depending on the alternative, a more likely
scenario, consistent with the assumptions in Executive Order 14330, is
that these alternatives would be included as one part of a menu option.
For example, a target date fund might include an annuity feature or an
asset allocation fund might invest a portion of its assets in private
equity. Similarly, some plans might offer professionally managed
accounts that incorporate alternative investments on the glide paths
customized for participants. The Department seeks information on what
types of vehicles plans would use to offer alternatives and how they
would work. The Department anticipates that the main channel through
which this proposal would lead to greater defined contribution plan
investment in alternative assets would be within target date funds.
Therefore, for purposes of quantifying the effects of this proposal
leading to greater investment in alternatives, the Department focuses
on the target date fund avenue exclusively.
In many respects, offering alternative investments as a portion of
a target date fund or other asset allocation fund is an effective way
for participant-directed individual account plans to include more
sophisticated investment products with the potential to increase risk-
adjusted returns on investment. Such an arrangement would permit
fiduciaries with concerns about the liquidity and pricing
considerations of alternative assets to have them combined with more
liquid assets from public markets. This would allow fiduciaries to use
the liquid assets from the asset allocation pool, as well as possible
inflows, to mitigate any liquidity concerns arising from potential
outflows.
Target date funds play a vital role in retirement plans. About 90
percent of large, participant-directed defined contribution plans
reported having a target date fund on their Form 5500 filing for
2023.\116\ Similarly, a survey conducted by the Plan Sponsor Council of
America (PSCA) showed that about 85 percent of all plans offered a
target date fund in 2024, though plans with fewer than 50 participants
were significantly less likely to offer target date funds, with only
about 66 percent reporting them in 2024.\117\ Most plans with automatic
enrollment use a target date fund as their default investment, which
results in a substantial number of participants holding these
funds.\118\ According to administrative data from Vanguard, about 84
percent of participants in defined contribution plans used target date
funds in 2024.\119\ Similarly, in 2022 approximately 68 percent of
401(k) participants in the EBRI/ICI 401(k) database held target date
funds.\120\
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\116\ EBSA tabulations of audited plans in the BrightScope
database.
\117\ PSCA, 68th Annual Survey: The Source for 401(k) Plan
Benchmarking Data, Table 81 (2025).
\118\ Id., Tables 100 and 128.
\119\ Vanguard, How America Saves, Figure 79 (2025), <a href="https://workplace.vanguard.com/insights-and-research/report/how-america-saves-2025.html">https://workplace.vanguard.com/insights-and-research/report/how-america-saves-2025.html</a>.
\120\ Sarah Holden, Steven Bass & Craig Copeland, 401(k) Plan
Asset Allocation, Account Balances, and Loan Activity in 2022, EBRI
Issue Brief No. 606 (Apr. 30, 2024), <a href="https://www.ebri.org/content/401">https://www.ebri.org/content/401</a>(k)-plan-asset-allocation-account-balances-and-loan-activity-in-
2022.
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Plans periodically select new investments. At the juncture when a
plan fiduciary chooses a new target date fund, it may consider
selecting a fund that includes alternative investments. Examining data
in this area provides a general sense of how rapidly target date funds
with alternatives would be adopted by plans under the proposed rule.
The Department estimates that every year, across the roughly 721,000
plans affected by the proposed rule, there would be approximately
51,307 instances when a target date series with alternative investments
is added to a menus.\121\ Each year this would impact an estimated
47,333 plans because some plans adopting these target date funds with
alternative investments would add multiple series.\122\ These plans
would, in aggregate, have about $178 billion and 4.5 million
participants flowing each year into target date funds with alternative
investments. While the Department estimated these figures using the
detailed data available for large 401(k) plans, it extrapolated the
results to the whole population of affected plans, including small
plans, non-401(k) plans, and plans with missing data.
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\121\ EBSA tabulations of audited plans in the BrightScope
database. Data is only available for large 401(k) plans that have
filed a Form 5500 whose investment data has been captured on the
Schedule H's attached Schedule of Assets. The estimate includes
instances where plans adopt a new TDF to replace an existing TDF,
instances where plans are adding another TDF to their menu, and
instances where a newly formed plan offers a TDF on its menu.
\122\ Id.
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In generating these estimates, the Department assumes that plans
will continue to adopt new target date funds at the current pace. It is
possible, however, that under the proposed rulemaking plan fiduciaries
would adopt new target date funds more rapidly, including because they
wish to offer alternative investments to their participants.
In order to estimate how many assets and participants would be
invested in target date funds with alternative investments, the
Department applies estimates observed in the baseline for target date
funds generally. The Department assumes that 30 percent of plan assets
are invested in a target date fund.\123\ However, it is difficult to
estimate the share of participants eligible for a participant-directed
defined contribution plan who would have an account balanc

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