FLASHPOINT: PRIVATE FUNDS (AND MORE) ARE ON THEIR WAY TO 401(K) PLANS

by: Fred Reish, Esq.

The Department of Labor (“DOL”) has issued a proposed regulation (“Proposal”) providing guidance related to the selection of investments for participant-directed plans, such as 401(k) plans. The Proposal is available on the EBSA website at 2026-06178.pdf

We need to warn you at the outset that this FlashPoint is longer than our newsletters customarily are. The Proposal is a significant statement by the DOL about its expectations of fiduciaries and should be taken seriously.

In essence, the Proposal responds to the President’s Executive Order to the DOL to provide guidance to fiduciaries that, if followed, will enable them to safely make alternative investments available in their 401(k) investment line-up. Under the Proposal, the DOL outlines six factors that must be knowledgeably examined and considered, and then prudently applied, to the fiduciary’s investment decisions in order for their fiduciary duties as to the investment to be met.

The balance of this FlashPoint describes the Proposal in more detail.

The Beginning: An Executive Order

The Proposal is the direct result of the August 7, 2025, White House Executive Order (“EO”) entitled “Democratizing Access to Alternative Assets for 401(k) Investors.” (You can find the order here: Democratizing Access to Alternative Assets for 401(K) Investors – The White House)

The EO’s purpose was to express the need for a framework under which plan sponsors can safely make alternate investments available to their 401(k) plan participants. The EO defines “alternative assets” as:

• Private market investments, such as private equity and private credit funds, and hedge funds.

• Direct and indirect investments in real estate, including debt associated with real estate.

• Actively managed investment vehicles investing in digital assets.

• Direct and indirect investments in commodities.

• Direct and indirect interests in projects financing infrastructure development.

• Lifetime income investment strategies including longevity risk-sharing pools.

The EO ordered the DOL to clarify its position on alternate assets and the related fiduciary process in relation to alternative assets. The DOL was directed to identify the criteria that fiduciaries should use to evaluate and select such assets, specifically looking at the possible higher cost versus the potentially higher long-term net gains that such broader investment options could provide.

The Proposal is the DOL’s response to the EO and, as explained below, actually goes beyond it to provide additional guidance to fiduciaries.

The EO also expresses the Administration’s concern about “frivolous” lawsuits against plan fiduciaries, particularly those that have a chilling effect on broader investment menus. The EO directs the DOL to take steps to reduce that risk. In particular, the EO requires that, in providing its guidance, the DOL “prioritize actions that may curb ERISA litigation that constrains fiduciaries’ ability to apply their best judgment in offering investment opportunities to relevant plan participants.” 

The Proposal addresses that part of the EO by developing what the DOL calls a fiduciary “safe harbor,” that will, if the Proposal is finalized and survives court challenges, give plan fiduciaries more protection from claims that they breached their duty. However, notwithstanding the label, the harbor is not entirely safe – that is, it does not provide that participants and the courts are barred from finding that the investment was improper. Instead, the Proposal gives the fiduciaries the benefit of the doubt that, in the absence of a showing of actual imprudence, the fiduciaries have acted properly. Plaintiffs in lawsuits will still be able to present evidence of impropriety by the fiduciaries, allowing the courts to find that there was a breach of duty nonetheless in certain circumstances.

What the Proposal Actually Provides:  Finding the Safe Harbor in the Investment Ocean

The Proposal does two things:

1. Guidance: the Proposal outlines certain criteria that fiduciaries may follow for selecting alternative assets in asset allocation vehicles.

2. Protection: It then provides that a fiduciary following such criteria will be presumed to have acted prudently.

But the Proposal goes beyond simply protecting fiduciaries by providing this criteria for including alternative assets in asset allocation investments in multi-asset class investments. The Proposal also provides the criteria for selection of standalone alternative asset investments and also for traditional plan investments (such as mutual funds and collective investment trusts) for ERISA-governed, participant-directed retirement plans.  That was a surprise.

The Proposal starts off by reaffirming the DOL’s long-held view that ERISA is neutral concerning investments. Instead of preferring some types of investments over others, the law imposes on fiduciaries the duty to prudently decide which investments are appropriate for their plans and participants.

The Proposal then reminds us that, to engage in a prudent process, fiduciaries must appropriately consider all “relevant factors,” i.e., the facts and circumstances that an individual who is familiar with a particular type of investment would consider material for evaluating that investment type. These factors must be “objectively, thoroughly, and analytically” contemplated.

The DOL identified six relevant factors that are commonly used to measure the prudence of most investments that would be included in a participant-directed plan. Those are:

• Performance: identifying and considering the anticipated risk-adjusted returns of investments that are being considered;

• Fees: understanding the fees and costs of the considered investments and comparing them to comparable investments;

• Liquidity: obtaining and evaluating information about the plan’s liquidity needs and how those would be met in light of the plan’s investments, particularly if the plan invests in private investments, which are commonly fairly illiquid;

• Valuation: determining that the investments will be appropriately valued. Again, this is a special challenge for private investments that are not offered on a stock exchange;

• Performance benchmark: establishing a meaningful benchmark for each plan investment; and

• Complexity: the fiduciary evaluating the investment must have the “skills, knowledge, experience and capacity to comprehend” the investments. If not, they need to obtain advice from an investment advisor with such knowledge.

So, What Does the Safe Harbor Do?

If the fiduciary properly applies the six factors in evaluating an investment (that is, the material information is obtained and reviewed and, where the fiduciary lacks the necessary expertise, he or she engages an adviser), the fiduciary will be entitled to the DOL’s proposed safe harbor. More specifically, the DOL describes the Proposal’s relief as significant deference by the courts. In legalese, this is called a “rebuttable presumption” – that is, the court will presume that the fiduciary acted properly, unless the plaintiff presents significant evidence to the contrary.

The prudent process that a fiduciary must follow in making plan investments has two elements: (1) the fiduciary must be “informed,” and (2) the resulting decision must be “reasoned.” To be informed, a fiduciary must gather the information that a knowledgeable person would want to review and then review it carefully and thoroughly (getting help from advisers or consultants, if needed). Then, the ultimate investment decision must also be well-reasoned, and be based on the information reviewed. That is what the law has been. However, the Proposal says that, if a fiduciary satisfies the “informed” requirement, he or she is presumed to have made a reasoned, or prudent, judgment based on that information. That presumption – the safe harbor – then imposes a “hurdle” for plaintiffs to surmount – they must prove that the decision by the fiduciaries was not a reasonable conclusion based on the information reviewed.

Critically, the presumption applies on a factor-by-factor basis. That is, if the relevant information is properly evaluated for one of the six factors, then there is a rebuttable presumption for that factor only. To obtain the full intended benefit of the Proposal, fiduciaries must be “informed” for all six factors.

Beyond that, if there are other relevant factors – in addition to the six listed in the proposal — the fiduciary must take those factors into account, as well. But the fiduciary will not be presumed to have appropriately reviewed and applied those other factors; the favorable presumption applies only to the stated six factors in the Proposal.

What Does This Really Mean to Fiduciaries?

The presumption and the deference provided by the Proposal will, if finalized, give plan fiduciaries a strong “leg up” if they are sued by participants for alleged fiduciary breaches. It would make it harder for plaintiffs to prove and the court to find that a fiduciary breach has occurred, potentially much harder.

However, the Proposal has hurdles of its own to face. Besides the fact that it is only proposed at this point and needs to be finalized to be effective, it is likely that plaintiffs’ attorneys will challenge the legality of the presumption in court. While ERISA empowers the DOL to write regulations about its provisions, it is not clear that the authorization extends to reducing the protection for participants afforded by the fiduciary standard. And, government regulations are easier for the courts to overturn since the Supreme Court ruling in the Loper Bright case last year.

What Else Does the Proposal Do?

The Proposal includes other “safe harbors” that are not labeled as such, yet have that effect.  In a number of the examples, the Proposal provides that, under defined circumstances, fiduciaries can rely on statements made by the managers of investments, such as private funds. For example, the Proposal relieves fiduciaries from some of their required independent investigation as to the liquidity of certain non-mutual fund investments if there is a written representation from the investment’s manager that the investment has a “liquidity risk management program” that substantially meets the requirements of ERISA, and the fiduciary reads, critically reviews, and understands the written representation (and gets assistance from an expert, if needed). There is no reliance, however, if the fiduciary knows or should know that the representation is questionable.

Similar relief is found throughout the Proposal.  In fact, the Proposal and its preamble use the phrase “written representation” 30 times.

Additional Considerations

Investment vehicles with alternative asset allocations. The EO contemplated that alternative assets would be allocations within investment vehicles – that is, they would be part of some type of a managed fund, rather than stand-alone investments of the plan. In those cases, the primary role of plan fiduciaries is to determine if the manager has the “skill, knowledge, experience and capacity to understand” those alternative investments.  Where the vehicle is a mutual fund, plan fiduciaries will have to do the investigation, perhaps with the help of a qualified adviser, on their own. However, where the vehicle is a managed account or a collective investment trust (“CIT”), the manager of the account and the trustee of the CIT are 3(38) investment managers and subject to ERISA’s fiduciary standards. In that case, if the investment agreements say that the investment manager is required to comply with the final version of the Proposal, the plan fiduciaries’ only fiduciary responsibility would be to vet the investment manager and its competency.

Risk-adjusted returns. The Proposal focuses on risk-adjusted returns as the measurement of performance.  For example, evaluating the Performance factor, the Proposal requires the fiduciary to:

appropriately consider a reasonable number of similar alternatives and determine that the risk-adjusted expected returns, over an appropriate time-horizon, of the designated investment alternative, net of anticipated fees and expenses, further the purposes of the plan by enabling participants and beneficiaries to maximize risk-adjusted returns on investment net of fees and expenses. [Emphasis added]

That concept is repeated throughout the Proposal and accompanying materials a total of 70 times, suggesting that the DOL unconditionally views the risk-adjusted expected return as a primary metric for evaluating and selecting investments for participant-directed plans.

Selection of plan investment lineup. The Proposal affirmatively states that the fiduciary standard of prudence applies to the menu of investments, and not just to the selection of individual investments:

A fiduciary with responsibility or authority for selecting designated investment alternatives has a duty to act prudently also when establishing a diversified menu of designated investment alternatives to further the purposes of the plan by enabling participants and beneficiaries in such plan to maximize risk-adjusted returns, net of fees, on investment across their entire portfolios in their plan. [Emphasis added.]

Concluding Thoughts

Remember that the Proposal is just that—a proposal. It has a long way to go to become final.

The period during which the DOL is accepting comments on the proposal ends June 1, 2026. After that, the DOL will review the comments and draft the final regulation. That could easily take three months. Then, it will be submitted to the Office of Management and Budget for a review, which ordinarily takes 45 to 75 days. Once approved by the OMB, it will be published in the Federal Register, and will become effective 60 days after that. In other words, it could be the end of this year before it is effective. After that, there is the specter of litigation that may further delay the applicability of these rules to plans.

For the moment, though, pay particular attention to the Proposal’s six defined factors. For each factor, there is a standard that reflects the DOL’s expectations of plan fiduciaries. In addition, there are examples of prudent and imprudent fiduciary behavior under each example. Those factors, standards, and examples reflect the DOL’s thinking. That thinking is consistent with views on retirement plan professionals in most cases. While some may be different or more demanding than current practices, they still reflect the behavior that the DOL clearly expects from fiduciaries, and fiduciaries should take that into account as they undertake their activities on behalf of plans.

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Interested in learning more? Join Fred alongside Derrin Watson for an extra special ERISApedia webcast where they will go further in depth regarding this Proposal on Thursday, April 16 at 2:00pm Eastern. Sign up here!