Investment selection remains a key fiduciary responsibility for Plan Sponsors. A proposed regulation from the U.S. Department of Labor’s Employee Benefits Security Administration, or EBSA, is intended to provide more clarity around how fiduciaries should evaluate investment alternatives in participant-directed defined contribution plans, including 401(k) plans.
At a high level, if this proposed regulation should take effect, it would create another DOL “safe harbor.” A safe harbor is designed to help give fiduciaries protection when they follow a prudent, clearly defined process, as defined by the DOL. It is not necessarily a complete shield against legal challenge.
Here, the proposed regulation would establish six factors, that if followed, would establish a process-based framework for selecting investment options. It reinforces a familiar principle in retirement plan oversight: prudence is rooted in process, not investment outcomes. Also, if the proposed safe harbor was followed, it would establish a “presumption of prudence” that the DOL hopes will reduce the number of ERISA class-action lawsuits.
The proposed rule is designed to explain the steps plan fiduciaries should take when considering investment options for their lineup. It would also establish a framework that fiduciaries can use when selecting investment alternatives, which are increasingly found within some Qualified Default Investment Alternatives, Target Date Funds and Managed Accounts.
One important takeaway is that the proposal is asset-class neutral. It does not require or prohibit any specific type of investment. Instead, it focuses on the decision-making process and helps give fiduciaries more direction on how to evaluate options prudently while still considering the guardrails to which they are bound.
That matters because conversations around alternative investments can potentially create more heat than clarity. The key question is not whether a category is automatically good or bad. It is whether the option was reviewed through a thoughtful, objective, and well-documented process.
A major idea behind the proposal is litigation risk. Over the past several years, there has been a proliferation of class action lawsuits, and many claims have challenged fiduciary decisions even when committees believed they had followed a prudent process. This proposed safe harbor appears intended to address that problem by creating a clearer standard for what prudence looks like when selecting alternative investments like private equity and private credit.
If finalized, the proposal may give fiduciaries a more concrete basis for defending a well-documented plan but should not be treated as a complete defense.
There is precedent for this kind of approach. As an example, the Department of Labor created safe harbor protection around Qualified Default Investment Alternatives in 2007, helping shift plans away from principal preservation defaults and toward diversified, multi-asset solutions that may be better suited for long-term retirement investing.
The proposal points to six factors fiduciaries would need to assess when reviewing investments, including performance, fees, liquidity, valuation, benchmarks, and complexity. It also emphasizes broader considerations such as the role of the investment in the lineup, its risks and objectives, diversification impact, and the qualifications of the managers or service providers involved.
For Plan Sponsors, those ideas should sound familiar. What is new is the added specificity around how the Department of Labor expects fiduciaries to approach them. Just as important, these six factors may have value beyond the investments that prompted the proposal. They are likely useful standards for evaluating other investment options within a participant-directed plan as well.
Much of the attention around the proposed rule has centered on alternative investments. That does not necessarily mean Plan Sponsors are expected to add alternatives to their plans. It also does not mean alternative assets should be treated as inherently imprudent. Instead, the proposal suggests they should be evaluated the same way any other investment should be evaluated – through a prudent, documented, and objective review process.
Because the rule is still proposed, final requirements may change. Even so, this may be a good time for Plan Sponsors to revisit the foundation of their investment governance process.
That may include reviewing committee documentation, confirming that meeting minutes reflect key deliberations, and making sure the investment policy statement and due diligence process still align with current oversight practices. It may also be worth considering whether these six factors should be incorporated now into the Investment Policy Statement for participant-directed plans.
The practical takeaway for retirement plan committees is to ensure a prudent process is in place governing all decisions that the committee makes, in concert with an independent expert/fiduciary and have documentation reflecting the plan committee’s process. Whether or not the rule is finalized, none of these changes absolve fiduciaries from their ongoing monitoring and duties.
At Sentinel Group, we know regulatory developments like this can raise important questions for Plan Sponsors. Our role is to help make those questions easier to understand and easier to work through. As this proposal moves through the rulemaking process, staying informed and reviewing your governance practices now can help put your committee in a stronger position later.
Source: https://www.dol.gov/newsroom/releases/ebsa/ebsa20260330
This material is provided for general informational purposes only and is not intended as legal, tax, ERISA, fiduciary, or investment advice. Because the rule remains proposed and may change, employers should consult their legal, tax, and retirement plan advisers regarding their particular circumstances before adopting or modifying any plan design or governance practice.
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