Login
In March 2026, the U.S. Department of Labor (DOL) issued a proposed regulation — ”Fiduciary Duties in Selecting Designated Investment Alternatives” — giving 401(k) plan sponsors one of the clearest roadmaps yet for prudent investment selection. The rule identifies six specific factors fiduciaries must evaluate when selecting plan investments and establishes a process-based safe harbor that presumes your decisions are reasonable if you follow it. Two points worth understanding upfront:
- The rule was prompted by an executive order to expand 401(k) access to alternative investments, but its scope is broader — it applies to the selection of any plan investment, not just alternatives.
- The rule does not end or replace existing fiduciary requirements. ERISA's duties of prudence and loyalty, and the diversification requirements already imposed on plan sponsors, remain fully in effect.
Political debates over 401(k) investment rules come and go, but your core obligation under the Employee Retirement Income Security Act of 1974 (ERISA) does not. The new rule gives that obligation a more concrete, practical framework — and meaningful protection from litigation when you follow it.
The Shifting Regulatory Backdrop
The proposed rule is a direct response to years of regulatory turbulence regarding 401(k) investment selection:
- Prior DOL guidance discouraged including alternative assets — such as private equity, digital assets, and cryptocurrency — in 401(k) menus. The current administration has rescinded that guidance and taken an asset-neutral stance.
- The Trump administration has begun the process of rescinding the 2022 "ESG Rule."
- ERISA class action litigation has surged, with over 500 excessive fee lawsuits filed since 2016 — leaving many plan sponsors reluctant to offer anything beyond the most conventional investment options.
The rule addresses a different question than the ESG rule rescission: not what factors fiduciaries may consider, but how fiduciaries demonstrate a prudent selection process. The message from the DOL is consistent: base your decisions on financial merit, follow a documented process, and your judgment is more likely to be protected.
What ERISA's Fiduciary Standard Requires
ERISA imposes two enduring core duties on anyone who selects or manages 401(k) plan investments:
- The Duty of Prudence requires you to select investments with the care, skill, and diligence of a knowledgeable investor — the "prudent expert" standard. Decisions must be based on risk-return analysis, including fees, and prudence is judged on your process at the time of the decision, not on outcomes in hindsight.
- The Duty of Loyalty requires you to act solely in the interest of plan participants and beneficiaries — not to advance political, social, or corporate goals at their expense.
The DOL's proposed rule gives 401(k) investment fiduciaries a concrete, practical framework for meeting these duties.
Overview of the DOL's Proposed Rule
On August 7, 2025, President Trump issued Executive Order 14330 (Democratizing Access to Alternative Assets for 401(k) Investors), directing the DOL to propose regulations with safe harbors clarifying fiduciary duties when plans offer alternative assets — private equity, real estate, digital assets, commodities, infrastructure, and lifetime income strategies — and prioritizing approaches that curb litigation risk.
In response, the DOL proposed ”Fiduciary Duties in Selecting Designated Investment Alternatives”, broadening the rule's scope beyond alternative assets to apply to all investment selection decisions. The rule has two core goals: clarify what prudent investment selection requires and create a process-based safe harbor that protects fiduciaries from litigation.
The Proposed Rule's Safe Harbor
The proposed rule establishes a process-based safe harbor: when a fiduciary objectively, thoroughly, and analytically evaluates and documents any of the six factors, their judgment on those factors is presumed to have met their fiduciary duties under ERISA section 404(a)(1)(B). Two important points:
- The six factors are the framework; the safe harbor is the protection. The protection comes from the quality and documentation of your analysis — not simply from knowing the six factors.
- The protection attaches factor by factor. You only receive protection for the factors you thoroughly evaluated and documented.
ERISA's flexibility has created fertile ground for class action litigation — plaintiffs' attorneys routinely argue, with hindsight, that a fiduciary should have decided differently. Even when fiduciaries win, defense costs can run into the millions. The safe harbor shifts that burden significantly in your favor.
The Proposed Rule's Six-Factor Test
The DOL identified the six factors through a comprehensive review of case law, existing regulations, prior guidance, Executive Order 14330, and stakeholder input. The factors apply to all investment selection decisions, but how deeply each factor must be evaluated depends on the nature of the investment.
Performance
The fiduciary must consider a reasonable number of similar alternatives and determine that risk-adjusted expected returns, over an appropriate time horizon and net of fees, enable participants to maximize risk-adjusted returns.
In practice: maximize returns for a given level of risk — not simply the highest returns. Weight long-term historical performance more heavily than short-term results. A lower-risk, lower-return strategy — such as one incorporating alternative assets with low correlations to stocks and bonds — can be prudent if it improves risk-adjusted returns.
Fees
The fiduciary must consider a reasonable number of similar alternatives and determine that fees are appropriate relative to risk-adjusted expected returns and any other value the investment brings to the plan. "Value" includes any benefits, features, or services beyond risk-adjusted returns.
The lowest-cost option is not required, but higher fees must be justified with a clear value proposition. Always check for multiple share classes — selecting a higher-cost share class when a cheaper identical class is available is a process flaw the DOL specifically calls out.
Liquidity
The fiduciary must determine if the investment will have sufficient liquidity to meet plan needs at both the participant level (withdrawals, loans, hardship distributions) and plan level (potential termination, recordkeeper changes).
Illiquid alternatives may be appropriate for participants with long time horizons, but liquidity tradeoffs must be evaluated and documented.
Valuation
The fiduciary must determine the investment has adequate measures to ensure timely and accurate valuation.
For publicly traded funds, this is straightforward. For non-publicly traded assets, the process must be independent and conflict-free — the DOL cautions against relying on valuations from a manager with a financial interest in the outcome.
Benchmarking
The fiduciary must determine the investment has a meaningful benchmark — defined as "an investment, strategy, index, or other comparator that has similar mandates, strategies, objectives, and risks" — and compare risk-adjusted expected returns, net of fees, to that benchmark.
Comparing a target date fund to a large-cap equity index is not meaningful. For investments with private equity sleeves, a custom composite benchmark built with the help of a qualified investment adviser may be appropriate.
Complexity
The fiduciary must determine whether they have the skills, knowledge, experience, and capacity to understand the investment sufficiently — or must seek assistance from a qualified adviser, investment manager, or other professional.
Complexity also means operationalizing an investment correctly. A fiduciary who adds a managed account service but fails to provide sufficient participant information to the service — so participants don't receive the customized portfolios that justify the higher fee — fails the complexity standard even if the investment itself was appropriate.
The Proposed Rule's Asset-Neutral Stance
The rule is asset-neutral: no investment type is categorically permitted or prohibited — including alternative assets like private equity, real estate, infrastructure, digital assets, and lifetime income products. What matters is the process, not the asset class.
Delegating to a 3(38) Investment Manager
The DOL's proposed rule specifically recognizes that prudently delegating investment selection to an ERISA Section 3(38) Investment Manager satisfies the safe harbor — making delegation a viable path to fiduciary protection for plan sponsors who need it.
Fitting the Rule into Your 401(k) Investment Fiduciary Responsibilities
ERISA imposes three core investment-related fiduciary responsibilities on 401(k) plan sponsors: build a diversified investment menu, select prudent investments, and monitor those investments on an ongoing basis. The DOL's proposed rule directly addresses the second — prudent investment selection — by establishing the six-factor test and safe harbor. While it creates no new requirements for the first and third responsibilities, its process-based framework is a useful guide for all three.
Build a Diversified 401(k) Investment Menu
ERISA Section 404(c) requires a diversified range of investment options with meaningfully different risk and return characteristics. The technical minimum is three asset classes — equity (stocks), fixed income (bonds), and capital preservation (e.g., stable value or money market) — though most well-constructed menus go further. The goal: give participants enough variety to build a portfolio suited to their time horizon and risk tolerance.
Apply the Six-Factor Test to Each Investment
The six-factor test is the core of your investment selection process. Apply it objectively, thoroughly, and analytically to each investment you consider — and document your analysis. That documentation serves as your evidence of prudence and supports your claim to safe harbor protection.
Monitor Your Investment Menu Regularly
Selecting a sound lineup is not a one-time event. ERISA requires ongoing monitoring — a duty the Supreme Court affirmed in Tibble v. Edison International. Review your menu at least quarterly, evaluating each fund against its benchmark and peers using the same six-factor test. A fund that consistently underperforms or charges fees out of line with comparable options warrants replacement. Document your process throughout.
Need Help? Hire a 3(38) Investment Manager
If managing investment selection and monitoring is beyond your team's bandwidth or expertise, consider hiring an ERISA Section 3(38) Investment Manager — a bank, insurance company, or Registered Investment Advisor (RIA) that assumes sole fiduciary responsibility for selecting and monitoring your plan's investment options.
This is meaningfully different from hiring a 3(21) investment adviser, who provides recommendations but leaves final decision-making authority and fiduciary liability with you. With a 3(38) manager, your fiduciary responsibility narrows to one task: monitoring the manager to confirm they are performing their duties competently, on schedule, and for reasonable fees.
The Time to Act is Now!
The DOL's proposed rule is open for public comment and not yet final — but plan sponsors don't need to wait to act on its guidance. The six-factor framework reflects the DOL's current position on prudent investment selection and can serve as a defensible basis for investment decisions today, even before the rule is finalized.
The proposed rule reinforces what prudent plan sponsors have always known: a disciplined, documented, financially-grounded investment process is both your best tool for serving your employees and your best defense against liability. Do that consistently — or hire a qualified professional who will — and you'll be well positioned regardless of which way the regulatory winds are blowing in the future.
