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In March 2026, the Department of Labor proposed a six-factor regulation that would, for the first time, spell out a step-by-step process for plan fiduciaries to follow when selecting investments for a 401(k) or similar participant-directed plan. The framework is designed to be asset-neutral and to apply to everything from money market funds to private equity sleeves to digital-asset vehicles, so the language is necessarily broad. On paper, it can feel intimidating.
Here's the thing: if your plan offers a menu of well-constructed passive index mutual funds — the kind offered by mainstream providers like Vanguard, Fidelity, and Schwab — the six-factor analysis is much more straightforward than it appears. The rule's framework was written to accommodate complex products, but a straightforward passive index lineup answers most of the questions by structural feature rather than by ongoing analytical work.
This post walks through why that's the case, and what the documentation looks like in practice.
Who Is Responsible for Selecting 401(k) Investments?
By default, the plan sponsor is responsible for selecting plan investments. The sponsor can discharge that responsibility themselves, with no outside help. Many do, particularly those with internal investment expertise or an investment committee.
Sponsors who would rather not personally apply the six-factor process can delegate the work to an Investment Manager (IM). An IM is an outside professional appointed under ERISA section 3(38) who takes discretionary authority for selecting, monitoring, and replacing the plan's investments. Under the appointment, the IM has discretionary authority to act; the sponsor retains responsibility for prudently choosing and overseeing the IM but is not liable for the IM's individual investment decisions.
Both paths satisfy ERISA, and the rest of this post applies to either one. The six-factor process and the documentation it produces are the same whether the sponsor does the work directly or an IM does it on the sponsor's behalf. Where the distinction matters in what follows, we refer to "the fiduciary" — meaning whichever party is responsible for the analysis.
The Six Factors, Applied to Passive Index Funds
The proposed rule organizes the prudent process around six factors. Here's how each one plays out for an SEC-registered passive index mutual fund:
- Performance. The factor asks whether the fund's risk-adjusted returns, net of fees, are appropriate for its level of risk over an appropriate time horizon. A passive index fund's strategy is to match its assigned index, not beat it. The relevant question is therefore whether the fund is tracking its index closely — a question answered directly by market correlation measures (beta and R-squared) calculated against the benchmark.
- Fees. Are the fund's fees appropriate? Index funds from major providers carry expense ratios that consistently rank in the lowest quintile of their Morningstar peer groups. The Morningstar expense-ratio rating tells you this directly. The remaining work is confirming the plan is held in the lowest-cost share class for which it qualifies — a one-question conversation with the recordkeeper.
- Liquidity. Can the fund meet the plan's and participants' need to move money in and out? Every SEC-registered open-end mutual fund must maintain a liquidity risk management program under Rule 22e-4 of the Investment Company Act. Confirming the fund is a registered open-end mutual fund satisfies the factor. No additional analysis required.
- Valuation. Does the fund value its holdings properly? SEC-registered mutual funds value their holdings under Rule 2a-5 procedures and produce audited financial statements. Passive index funds mostly hold publicly traded securities with daily exchange prices. The factor is satisfied by the fund's regulatory structure.
- Benchmark. Is the benchmark meaningful? An index fund's benchmark is the index it is built to track. The relationship is meaningful by definition. R-squared against the benchmark confirms it quantitatively.
- Complexity. Does the fiduciary understand the fund? Passive index strategies are among the most transparent investment vehicles in existence. The strategy fits in one sentence: hold the securities in the index, in their index weights.
Four of the six factors — Liquidity, Valuation, Benchmark, and Complexity — are satisfied largely by structural features of registered open-end mutual funds tracking published indices. Performance and Fees require ongoing data, but the data is readily available and the analysis is bounded.
This is what we mean when we say the rule's framework makes an exceptionally strong case for well-constructed passive index menus. The rule was written to handle the full universe of investment products, including complex ones, but the framework rewards simplicity. A sponsor or IM who chooses a passive index strategy doesn't escape the six-factor process — they sail through it.
What the Documentation Looks Like
Under the rule, the fiduciary's process needs to be documented. In practice, that means an Investment Policy Statement that describes the strategy and the prudent process the fiduciary follows, and a periodic Monitoring Report that applies the process to each fund in the lineup.
For a passive-index lineup, both documents are straightforward to maintain, whether the sponsor produces them directly or receives them from an IM.
The Investment Policy Statement
An Investment Policy Statement (IPS) is the rules-of-the-road document for a plan's investment program. It describes the plan's objectives, the strategy chosen to deliver them, and the process by which investment alternatives are selected and monitored. It is not legally required for most plans, but it is widely treated as a baseline element of prudent fiduciary practice. For a passive-index plan, the IPS can be a tightly scoped piece of work covering:
- The plan's investment objectives (diversification, risk-adjusted market returns, cost efficiency)
- The investment strategy chosen to deliver those objectives (passive index funds, target-date funds-of-index-funds, and a money market fund for capital preservation)
- The party responsible for selecting and monitoring investments (the plan sponsor itself, or an IM appointed by the sponsor)
- The six-factor process the fiduciary applies to each fund
- The quarterly Monitoring Report the fiduciary produces
In our view, the result is an IPS that is short, defensible, and easy for a plan administrator to understand without specialized training. An example can be found here.
The Quarterly Monitoring Report
The Monitoring Report is the document that evidences the fiduciary's ongoing application of the six-factor process. For a passive-index lineup, it consists of:
- A short narrative confirming each factor is met for each fund
- A summary table with the determination for each factor and the supporting data
- A detail table with fund-level data: returns, benchmark returns, beta, R-squared, expense ratio, expense-ratio rating, and an overall determination
The report doesn't need to be long. It needs to be accurate, current, and consistent with the framework laid out in the IPS. For a stable passive-index lineup, the structural-factor language (Liquidity, Valuation, Complexity) is largely the same each quarter; what changes is the Performance and Fees data drawn from current Morningstar peer information. An example can be found here.
A quarterly Monitoring Report — whether self-produced or delivered by an IM — gives the plan administrator contemporaneous, factor-by-factor documentation of prudent process. If a question ever arises about whether the plan satisfied its fiduciary obligations, the documentation is already in hand.
You've Got This!
The new DOL rule is worth taking seriously. It clarifies what a prudent investment-selection process looks like, and the clarity is genuinely useful — sponsors who follow the framework can be confident their decisions will hold up to scrutiny.
For a plan sponsor running a participant-directed plan with a menu of mainstream passive index funds, the framework asks the right questions and gets clean answers. Most of the work is done by the products themselves. The rest is bounded, well-documented, and well within reach of any sponsor — whether they apply the process themselves or delegate it to a qualified IM.
The framework the rule describes is consistent with existing case law on the duty of prudence, so following it as a matter of process is good fiduciary practice regardless of the rule's ultimate fate.
If you sponsor a plan and you've been wondering whether the new rule means you need to overhaul your investment menu or hire a small army of consultants: it doesn't. A well-constructed passive index lineup, supported by an IPS and a quarterly monitoring report, will get you there.
