Fiduciaries Take Note: DOL’s New Proposed 401(k) Rule Focuses on Process

A new proposed rule from the Department of Labor’s Employee Benefits Security Administration outlines how 401(k) fiduciaries must assess alternative assets like private equity, private credit and real estate under ERISA’s prudence standard. The proposal includes a six-factor safe harbor covering fees, performance, liquidity, valuation and benchmarking.

Alternative investments have long been permissible under ERISA, but adoption has remained limited because of regulatory uncertainty and litigation risk. The proposal introduces a neutral, process-based framework for evaluating and documenting those decisions. 

Proposed Rule Adds Safe Harbor Factors

The proposed rule reinforces a process-based standard for fiduciary prudence, focusing on how fiduciaries document and defend investment decisions instead of steering plan committees away from specific asset classes.

The proposal lays out six factors that fiduciaries should consider and document:

• Performance
• Fees
• Liquidity
• Valuation
• Benchmarking, and
• Complexity.

That framework reflects the DOL’s neutral stance on asset selection – and it applies only to designated investment options, not to brokerage windows or self‑directed brokerage accounts.

“Our rule clearly spells out that managers must evaluate any and all potential product offerings by following a prudent process,” said Deputy Secretary of Labor Keith Sonderling. “This proposal is decidedly neutral and refrains from saying that any asset class is any better or worse than other investment types, as the law requires.”

What Fiduciaries Need to Know

Karen Brandon, Morristown shareholder at Ogletree Deakins, said she expects DOL investigators to evaluate fiduciary decisions against the factors outlined in the proposal, focusing on the process used rather than the specific asset selected. She added that the agency’s approach is asset-class neutral, with the emphasis on whether fiduciaries followed a prudent, consistent process.

That’s especially important when a plan committee evaluates adding a private-equity allocation within a target‑date fund. The committee must show how it evaluated fees, liquidity constraints, valuation methods and performance benchmarks against participant needs.

These cases usually hinge on whether the decision-making process holds up. If liquidity limits delay participant access, or valuation assumptions can’t be explained under audit, the issue becomes whether the committee’s process stands up to scrutiny.

The proposed rule puts pressure on committees to build a defensible record of their investment decisions. 

The documentation has to show what risks were taken, what benefits were expected and why the decision made sense at the time it was made.  

Valuation isn’t always transparent, and liquidity limits often restrict when participants can access their money. Benchmarking is less consistent, which makes it harder to judge performance. Together, these factors raise the analytical burden on committees and increase the importance of advisor support and internal controls.  

That’s the trade: more upside potential, but more to defend when those decisions are reviewed later.

Advisors Don’t Eliminate Fiduciary Duty

Most plan sponsors rely on investment advisors and other service providers to source and evaluate the options. That reliance doesn’t offload fiduciary responsibility. It changes what the committee has to prove.

Fiduciaries still need to show how recommendations were evaluated, what assumptions were tested and why the final decision meets the needs of participants.

“There will need to be documentation for all six factors in the process through meeting minutes,” said Brandon, explaining that this includes the investment alternatives considered, their fees and what each fee pays for, the plan’s purposes and liquidity needs, who will value the investments, and the benchmarks used for each investment.

Prior Guidance Rolls Back in Favor of Neutral Framework

Prior guidance that took a more cautionary stance on certain asset classes, including cryptocurrency, is being rolled back in favor of a neutral framework. The move aligns with President Trump’s executive order directing the DOL to remove unnecessary barriers to alternative investments in 401(k) plans.

The DOL is not directing fiduciaries to avoid specific investments. Instead, the agency is outlining how those investment decisions must be made, with fiduciary risk hinging on a process that is thorough, consistent and defensible under audit.  

Even with a documented evaluation process, fiduciary risk remains, especially if alternative investments underperform, said Brandon.

“Investments need to continue to be monitored and removed or closed from the plan menu if necessary,” she added. “A fiduciary also needs to make sure that participant accounts are diversified in the plan menu investment options and are not too heavily weighted toward alternatives like private equity. Over time, if the rates of return of the alternative investments do not justify their higher risk, fiduciaries will have risk for litigation from the plan participants holding those investments in their accounts.”

But process alone doesn’t eliminate exposure. “Diversification is a fiduciary duty under ERISA,” Brandon noted, adding that fiduciaries need to ensure participant accounts aren’t too heavily weighted toward higher‑risk alternatives like private equity.

Comment Period and Final Rule Timeline

The proposed rule is now open for public comment in the Federal Register, with a 60-day comment period. 

After the comment period closes, the DOL will review feedback and may revise the rule before issuing a final version. Any new standards for evaluating and documenting investment decisions would take effect only after the final rule is published, with an effective date set by the agency.