DOL Proposes Rule Clarifying ERISA Fiduciary Duties in Selecting 401(k) Investment Options

Seyfarth Synopsis: The Department of Labor (“DOL”) has released a proposed regulation titled, Fiduciary Duties in Selecting Designated Investment Alternatives (“Proposed Rule”), intended to clarify how ERISA fiduciaries satisfy their duty of prudence when selecting and monitoring investment options offer under participant‑directed defined contribution plans (e.g., 401(k) or 403(b) plans).

While the Proposed Rule has attracted attention due to renewed policy interest in private markets and other alternative asset classes, its legal significance is more fundamental. The DOL reaffirmed that ERISA fiduciary compliance is determined by process, not product, and that fiduciary obligations apply uniformly across all investment types.

Key Points for Retirement Plan Investment Fiduciaries

• The Proposed Rule is process‑based and asset‑neutral. It neither mandates nor prohibits any asset class, including alternative investments.
• The Proposed Rule provides a six-factor safe harbor to meet a fiduciary’s duty of prudence, which is grounded in documented, reasoned decision‑making. The six factors are: performance, fees, liquidity, valuation, benchmarking, and complexity.
• Asset‑allocation vehicles, including target‑date funds, are expressly within the rule’s scope.
• The Proposed Rule underscores the importance of documenting the fiduciary decision making process, the appropriate use of expert advisors, and ongoing monitoring.

Asset‑Neutral Clarification of Existing ERISA Principles

The Proposed Rule neither endorses nor discourages the inclusion of private equity, private credit, private real assets, or other alternatives in participant‑directed defined contribution plans (e.g., 401(k) and 403(b) plans). Instead, it adopts an expressly asset‑neutral framework focused on how fiduciaries should evaluate, select, and monitor designated investment alternatives (DIAs) offered under such plans.

Notably, the Proposed Rule expressly applies to asset‑allocation funds (e.g., target‑date funds), including those that incorporate exposure to non‑traditional investments. In doing so, the DOL underscores that ERISA fiduciary duties extend to the structure and underlying components of these vehicles, not merely their labels.

A Process‑Based Prudence Safe Harbor

At the center of the Proposed Rule is a process‑based safe harbor intended to provide fiduciaries with greater regulatory clarity. Under the Proposed Rule, a fiduciary who objectively, thoroughly, and analytically considers relevant facts and circumstances when selecting and then monitoring a DIA—and appropriately documents that process—is presumed to have satisfied ERISA’s duty of prudence under ERISA Section 404(a)(1)(B).

The DOL identified six non‑exclusive factors that fiduciaries should consider in most cases. While the relevance of each factor depends on the facts and circumstances, the DOL has indicated that these considerations will be integral to the vast majority of DIAs offered in participant‑directed plans.

Six Factors Identified for Fiduciaries to Evaluate

Performance. Fiduciaries should assess whether the DIA’s risk‑adjusted expected returns, over an appropriate time horizon and net of fees, are reasonably expected to further the purposes of the plan.

Fees and Expenses. Fees should be evaluated in light of the value provided. This includes not only expected risk‑adjusted returns, but also other benefits, features, or services that may further plan objectives.

Liquidity. Fiduciaries should determine whether the DIA has sufficient liquidity to meet anticipated needs at both the plan level and the participant level, including with respect to transfers to other investments, distributions and rebalancing.

Valuation. The Proposed Rule emphasizes the need for timely and accurate valuation practices consistent with plan administration and disclosure obligations. Fiduciaries are expected to understand and assess the DIA’s valuation methodology.

Performance Benchmarks. Each DIA should be measured against a meaningful benchmark—defined as a comparator with similar objectives, strategies, and risks. For new or innovative investment products, fiduciaries should identify the most appropriate available comparators while carefully evaluating the investment’s value proposition.

Complexity. Fiduciaries should consider whether they possess the expertise necessary to understand the DIA or whether they should engage qualified investment advisors or investment managers to assist in the evaluation and monitoring process.

Practical Implications for Retirement Plan Investment Fiduciaries

The Proposed Rule reinforces several themes that are already familiar to ERISA plan fiduciaries.

First, documentation remains crucial. Investment committee minutes and materials should clearly reflect the factors considered, the alternatives reviewed, advice received from experts, and the rationale for decisions made.

Second, fiduciaries should expect increased scrutiny of target‑date and other asset‑allocation funds, particularly with respect to liquidity management, valuation practices, and benchmark selection.

Third, the Proposed Rule highlights the importance of appropriate delegation and reliance on experts. While fiduciaries are not required to be investment specialists, they are expected to know when specialized knowledge is necessary and to retain qualified professionals accordingly.

Conclusion

The DOL’s Proposed Rule does not change ERISA’s fiduciary standards; however it articulates them with greater specificity in the context of modern defined contribution plan investment design. For plan fiduciaries, the message is clear: a disciplined, well‑documented, and consistently applied process remains the cornerstone of fiduciary compliance.

The DOL has invited comments on the Proposed Rule, specifically with respect to the six-factor safe harbor test. In the meantime, fiduciary committees should review their current processes and documentation practices in light of this guidance.