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June 1, 2026

The Honorable Daniel Aronowitz
Employee Benefits Security Administration
U.S. Department of Labor

 
Re:   Fiduciary Duties in Selecting Designated Investment Alternatives
         RIN 1210-AC38

Dear Assistant Secretary Aronowitz:

I am writing to express grave concerns regarding the Department’s proposal, Fiduciary Duties in Selecting Designated Investment Alternatives.[1] As discussed in further detail below, the rule would seriously erode critical safeguards adopted by Congress in enacting the Employee Benefit Retirement Security Act of 1974 (ERISA). It would do so without an adequate legal basis or economic justification, and without consideration to its potentially harmful effect on American workers’ retirement security. For these reasons, the rule should be withdrawn.

1. Introduction

The Department of Labor has proposed to create a new, process-based safe harbor for the selection of investments in participant-directed defined contribution retirement plans, such as 401(k) plans. The stated goal of the proposal is to make it easier for plan fiduciaries to provide access to “alternative” investments, such as private funds and digital assets, on the investment menus of these plans.[2] As drafted, however, the rule is much broader, weakening the standards that apply to the selection of all types of investments. If adopted in its current form, it would make it easier for retirement plan fiduciaries to escape legal accountability when they include imprudent investments on plan menus that expose retirement savers to excessive costs, substandard performance, and unwarranted risks.

The Department argues that the rule is necessary because a recent “epidemic” of often frivolous litigation has discouraged plan sponsors from including on their retirement plan investment menus alternative investments that offer the potential for improved performance and, thus, improved retirement security for plan participants. But the Department has failed to make a compelling case either that the rule is needed or that its proposed approach offers benefits that outweigh its risks.

• There has been no epidemic of litigation sufficient to justify the creation of a new legal safe harbor. Moreover, in crafting its proposed safe harbor, the Department fails to consider the benefits litigation has delivered by prompting plan fiduciaries to remove high-cost and under-performing funds from their plan menus. As a result, it fails to weigh the potential harmful effects of reducing plan fiduciaries’ legal accountability.

• Similarly, the Department fails to give adequate consideration to the potential harmful effects of adding alternative investments to retirement plans. Of particular concern, it doesn’t adequately assess the risk of permitting relatively untested investment strategies in the investments, such as target date funds, employees are defaulted into when enrolling in a plan. Nor does the Department adequately consider the potential impact on small companies if they are forced to rely more heavily on outside experts, including in some cases conflicted salespeople, to assist them in making investment selections.

• The proposed rule would rewrite the prudence standard, eliminating the critically important requirement to make a sound investment decision based on the analysis conducted. The Department offers no justification for such a sweeping policy change, which would affect the selection of investments of all types for hundreds of thousands of participant-directed individual account plans holding trillions of dollars in retirement assets.

• The proposed safe harbor includes examples on an appropriate process for selecting plan investment options that, in a number of areas, fall well short of what should be required to meet the high fiduciary standard articulated in the ERISA. Yet, plan fiduciaries that follow this process with regard to six factors identified as generally relevant to investment selections would be “presumed” to have met their fiduciary obligations with respect to those factors and would be “entitled to significant deference.”

• Finally, the proposed regulatory approach of incorporating explanatory text and implementation examples in the rule text, rather than as sub-regulatory guidance, is unworkable. Because of inconsistencies and lack of clarity in its use of important terms, the Department risks further confusing, rather than clarifying, the fiduciary obligations of plan sponsors when selecting investments for plan menus.

If courts accept the kind of superficial analysis put forward in the proposed safe harbor as satisfying plan sponsors’ fiduciary obligations to analyze such critically important factors as cost, liquidity, performance, and valuation, American workers could see a serious decline in the quality of retirement investments available to them. At the same time, companies could find themselves under increased pressure to add to their plan menus alternative investments that they are ill-equipped to analyze. Some may end up relying for advice on salespeople with an incentive to push the investments that are most profitable to them and their firm, rather than those that are best for plan participants. Faced with the prospect of paying outside experts to assist in investment selections, some small companies may choose to cancel their plans rather than shoulder these added costs.

If any of these predictions proves true, the millions of working families who rely on workplace retirement plans to save could find it even more difficult than it already is to amass sufficient savings to enjoy a financially secure and independent retirement.

1. Background

ERISA was enacted in 1974 in response to concerns that the funds of private pension plans were being mismanaged and abused.[3] Its goal was to protect the interests of participants and beneficiaries in employee benefit plans. Central to the protections adopted for retirement plans is a requirement that those who manage such plans, or who provide investment advice to plans for compensation, do so solely in the interest of plan participants and beneficiaries and avoid prohibited conflicts of interest.[4] In addition to this duty of loyalty, plan fiduciaries are held to a prudent expert standard under ERISA which requires them to discharge their duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”[5] It is the latter aspect of ERISA’s fiduciary standard that the Department now proposes to amend through the addition of a process-based safe harbor.

ERISA was enacted at a time when defined benefit plans dominated the pension world, and it was written with those traditional pension plans in mind. But its enactment laid the groundwork for the creation of defined contribution plans, such as 401(k) plans, in which employees use tax-deferred payroll contributions to fund an account in which they make the investment selections.[6] While 401(k) plans were initially typically offered in tandem with traditional defined benefit plans, they quickly came to dominate the pension landscape. (See chart below) The Department estimates that, by 2023, roughly 118 million workers participated in approximately 721,000 participant-directed individual account plans.[7] Meanwhile, the percentage of workers participating in a defined benefit has rapidly declined.

Number of Single Employer DB and DC Plans

1975-2021

 Source: American Academy of Actuaries[8]

This shift from defined benefit to defined contribution plans has been accompanied by an expansion in the number of companies offering retirement plans, as the above chart illustrates. At the same time, however, and despite the fact that most companies that offer retirement plans provide some sort of matching contributions, the primary cost of funding retirement accounts has shifted from companies to their employees.[9]

Significantly in the context of this rule, the move to participant-directed individual account plans has also shifted responsibility for investment decisions away from the highly trained teams of financial experts responsible for managing defined benefit plans and onto American workers. These workers, a large majority of whom have no financial training or investment expertise, are today responsible for key decisions that will determine their financial wellbeing in retirement, including: how much of their paycheck to contribute to the plan, how to invest that money at different stages of their career, and, in retirement, how to withdraw that money in a way that minimizes the risk of outliving their savings.

As numerous studies on Americans’ financial literacy have demonstrated, these are decisions most Americans are poorly equipped to make. As just one example, the Investor Survey Report released in 2025 by FINRA Foundation found that the average score on its 11-question, multiple choice test of financial knowledge was just 5.3 correct answers.[10] Survey respondents, all of whom were investors,[11] scored highest on general questions about the effect of inflation (which 77 percent answered correctly), risk and return (74 percent), and the definitions of stocks (74 percent) and bonds (62 percent). However, fewer than half of respondents correctly answered questions about: past performance as an indicator of future performance (41 percent); index funds versus actively managed funds (30 percent); municipal bonds versus other government bonds (30 percent); the definition of selling short (23 percent); and buying on margin (20 percent). Yet, in a participant-directed defined contribution plan, when the plan participant makes a poor investment decision, it is they, not the company, that bears the consequences.[12]

Among the most serious mistakes plan participant can make is not contributing, or not contributing enough, to their retirement account. This fundamental error appears to be all too common. Although progress has been made in recent years, a majority of Americans do not have sufficient retirement savings in these accounts to fund a secure and independent retirement. The average retirement savings for American households was $333,940 in 2023, while the median was just $87,000, according to the most recent Federal Reserve Survey of Consumer Finances.[13] Not surprisingly, the numbers are significantly higher for older age groups, who have had longer to save. But even here, the statistics suggest that most Americans are falling well short of what is needed to provide a comfortable income throughout retirement. The Federal Reserve numbers indicate that half of those aged 55-64 have less than $185,000 in retirement savings, and half of those aged 65-74 have less than $200,000 in retirement savings.[14]

Design changes that automate workers’ retirement investment decisions have helped to improve outcomes for plan participants. One study by a leading 401(k) administrator found, for example, that 61 percent of the plans it administers automatically enrolled employees into the plan, including 78 percent of plans with 1,000 or more participants.[15] While employees are free to leave the plan, automatic enrollment dramatically increases the participation rate and, as a result, the overall savings rate at companies that include this feature in their plan.[16]

Retirement savers’ investments have also been automated, with the vast majority of plans (87.2 percent according to one study) defaulting retirement savers into a target date fund when enrolling in the plan.[17] These investments can benefit less sophisticated investors, in particular, by freeing them from responsibility for determining how to adjust their investments as they age. Here again, plan participants are free to choose other investments from the plan menu, but many do not. As a result, target date funds remain the largest recipients of participant contributions.[18] Consequently, any regulatory change that affects the make-up of target date funds is of particular importance to employees’ retirement security.

Plan participants have also clearly benefited from ERISA’s requirement that plan fiduciaries provide a diverse menu of prudent investment options. As just one example of these benefits, research shows that those who invest in mutual funds through a 401(k) plan have paid consistently lower costs than those who invest outside a 401(k) plan.[19] Moreover, those costs have dropped dramatically over the past two decades, including a 55 percent drop in target date mutual fund costs since 2008.[20] (See chart below) Meanwhile, the fees paid by those who invest in mutual funds in an Individual Retirement Account (IRA) more closely track industry-wide averages, despite IRA investors’ making cost-conscious investment decisions.[21] Given the long-term impact of reducing investment costs, this one effect of the prudence standard has increased plan participants’ retirement account accumulations by untold billions of dollars.

Mutual Fund Expense Ratios in 401(k)s and Industrywide

Although the trillions of dollars amassed in participant-directed individual account plans falls well short of what’s needed to fully fund Americans’ retirement security, it is enough to have made the money in these accounts a tempting target for financial firms. In particular, firms have over the years encouraged plan participants to roll their money out of plans and into IRAs, where the rules are less rigorous and firms can extract higher profits.[22] Much of the recent debate over the fiduciary standard has focused on stemming inappropriate rollover recommendations, a fight industry appears for now to have won.[23] More recently, in addition to seeking to extract funds from retirement accounts, financial firms have sought access to retirement accounts for a wider array of investment products, including in particular private funds[24] and crypto assets.[25]

These efforts have met with considerable opposition from investor advocates concerned about the potentially harmful effects on Americans’ retirement security.[26] Until recently, in recognition of those concerns, the Department warned plan fiduciaries of the need to exercise special care when analyzing such investments.[27] Having recently withdrawn that past guidance, the Department has now issued the current rule proposal, which is designed to speed the adoption of such alternative assets. Instead of warning of the need for care when analyzing these complex, often opaque investments, it seeks to achieve that goal by reducing plan fiduciaries’ legal accountability for their selections of all types of investments to be included on plan menus.

• The Primary Justification for the Rule is Unfounded

As noted above, the Department argues that the rule is needed to counteract an epidemic of often frivolous litigation, but it fails to support this claim. There had been no ERISA class action litigation before Jerry Schlichter brought the first such lawsuit in the early 2000s, and only a handful of cases in the first few years after that.[28] Since the Supreme Court’s unanimous decision in 2015 affirming fiduciaries’ continuing duty to monitor investments and to remove imprudent ones,[29] and as case law became more established, additional law firms have become active in the field and the number of cases has risen. These cases have typically focused on either plans’ selection of high-cost investment options when lower cost options were available or their failure to remove such investments from plan menus.

After an initial period of rapid growth, the number of cases brought each year appears to have leveled off in recent years. According to a Chubb publication cited in the proposing release, the number of new cases has fluctuated between 50 and 100 a year from 2020 through 2024.[30] (See chart below) In addition to showing no clear upward trend in recent years, the Chubb data indicates that a significant percentage of recent cases have been against group health and defined benefit plans, rather than the defined contribution plans that are the subject of this rule proposal. The number of cases brought against defined contribution plans in 2024 would appear to be significantly lower than the number of such cases filed in 2020, according to the Chubb data, though the number of such cases in 2025 appears to be back near the top of that 50-100 range, according to a new analysis.[31]

Considered in context, moreover, the number of such cases brought against defined contribution plans remains extremely low. A source cited in the proposing release puts the number of such cases between 2016 and 2024 at “more than 500.”[32] According to the Department’s estimates, however, there were roughly 721,000 participant-directed account plans in 2023. Even if you add in the 98 new cases reportedly filed in 2025, that suggests that fewer than 0.1% of plans have been sued since 2016, and that just over 0.01% of plans are sued in any given year. By way of comparison, studies show that between 30 and 40 percent of physicians face a malpractice claim during their careers.[33]

Source: Chubb[34]

Evidence further suggests that only the very largest plans face a significant litigation threat. According to one source cited in the proposing release, among the small minority of plans with $1 billion or more in assets, more than half have been the target of at least one lawsuit.[35] In its publication on litigation trends, Chubb compiled a chart showing its best estimates of the size of 401(k) and 403(b) plans sued in 2020 and 2024 (see chart above).[36] While the chart does not report the actual percentages, its visual representation suggests that well over half of lawsuits in both 2020 and 2024 were against the small minority of plans with $1 billion or more in assets. In 2024, plans with more than $3 billion in assets constituted the largest category of plans sued.

The smallest breakout figure Chubb uses for its analysis is plans with less than $500 million in assets. Although the vast majority of plans fall into this category, it represents the smallest percentage of plans sued. For the 85 percent of plans with less than $5 million in assets,[37]  the risk of litigation appears to be all but non-existent. This is unsurprising, considering the high cost of bringing such claims and the significant challenges of showing loss causation.[38]

In addition to overstating the litigation threat faced by a large majority of plans, the discussion in the preamble of the proposing release focuses exclusively on the cost of such litigation to plan sponsors and ignores the benefits to plan participants. But the benefits are significant. Just one firm, Schlichter Bogard LLC, is credited with having obtained more than $1.5 billion in direct, cost-related rewards to plan participants.[39] Other firms have also won multi-million-dollar awards in recent years, suggesting that the total direct benefits to plans are much higher.[40]

But these benefits, in the form of reimbursements to plans, pale in comparison to the ongoing benefits plan participants derive from reductions in fees, improvements in performance of plan investments, and improvements in plan governance. While it is difficult to put a number on these benefits, it has been well documented that even apparently small reductions in investment fees can have a dramatic impact on investment returns over time.[41] As other plans learn from the experience of those that have been sued, costs have come down across the industry, spreading benefits of litigation beyond those plans that have been directly involved in lawsuits. In considering the potential impact of its rule proposal, the Department needs to consider whether that trend would be likely to continue if plan fiduciaries received new protections from legal accountability for their considerations of cost when selecting investments.[42]

Finally, the proposing release suggests that a significant percentage of the cases that have been brought against defined contribution plans have been frivolous cases targeting plans that have followed a prudent process in selecting investment menus. But it offers scant evidence, in the form of a few dismissed cases, to support this assumption. Chubb, for example, points to the fact that cases have increasingly settled out of court in recent years, and that companies have a high success rate when cases go to a trial verdict, as evidence that “meritless cases abound.”[43] While it is certainly possible that defendants are willing to settle “spurious” cases rather than pay the costs of defense, it is at least as plausible that defendants settle cases they believe, based on the extensive body of law that has developed over the past decade, they are likely to lose. When considering the validity of these lawsuits, moreover, it is worth noting that all three such cases that have been decided by the Supreme Court have resulted in unanimous decisions in favor of the plaintiffs.[44]

There is another side to the litigation issue that the proposing release barely touches on – the significant challenges plaintiffs’ attorneys face to prevail in such cases. As the proposing release notes, plaintiffs already bear the burden of proving a fiduciary violation. Accordingly, they must show, not just that a particular investment performed more poorly or had higher costs than other available alternatives, but that the fiduciary failed to follow a prudent decision-making process in selecting the investments. The plaintiff must also establish that the fiduciary breach caused the plan to lose money or resulted in an improper profit for the fiduciary.

As a recent academic paper on proving loss causation explains, this poses a significant challenge for plaintiffs that serves as an effective guard against speculative or frivolous litigation.[45] “Courts … examine whether plaintiffs have submitted credible expert testimony quantifying damages, and whether defendants have produced convincing evidence that the same outcomes would have occurred under prudent management. This judicial structure balances ERISA’s remedial goals with the need to guard against speculative claims, ensuring both accountability and fairness in fiduciary litigation,” the paper states.

Before the Department can make a credible case that a new regulatory safe harbor is needed, it must conduct a more balanced assessment of the costs and benefits of litigation.

1. The Rule Proposal Would Seriously Undermine ERISA’s Prudence Standard

The rule proposal is based on a noncontroversial premise: that ERISA is neutral with regard to the types of investments that may be included on the menu of a retirement plan and instead relies on plan fiduciaries to determine which investments are prudent for the plan and its participants.[46] Equally noncontroversial is the proposing release’s statement that determining whether a fiduciary has met that obligation turns on whether they have followed a prudent process, which includes “objectively, thoroughly, and analytically” considering “all relevant factors.” Statements such as these portray the rule proposal as a natural extension of longstanding interpretations of ERISA’s prudence standard.

In fact, however, the rule proposal fundamentally departs from these longstanding principles by eliminating the final, key component of a prudent process: the obligation to make a sound investment selection based on the information collected and the analysis conducted. The proposed rule does this by removing the provision in the prudence standard that requires plan fiduciaries to “act accordingly,” in other words, in accordance with their analysis. In its place, the rule proposal provides a “safe harbor” whereby, as long as the fiduciary has considered the relevant factors in making its investment selection, it should be “presumed” to have met its duties under section 404(a)(1)B) of ERISA” and is “entitled to significant deference.”

Watering down the prudence standard in this way would be deeply problematic in its own right. If upheld by courts, this one change would make it considerably more difficult to hold plan fiduciaries legally accountable for unsound investment selections that do not bear a reasonable relationship to the findings from their review of relevant factors.[47] This central flaw of the Department’s proposed approach is exacerbated by certain details of the proposed safe harbor:

• The proposal uses an inappropriate definition of the “purposes of the plan,” potentially distorting how plan fiduciaries consider the relevant factors in selecting investment options. The proposal characterizes the “purposes of the plan” as “enabling participants and beneficiaries in such plan to maximize risk-adjusted returns, net of fees, on investment across their entire portfolios in their plan.” The inclusion of the qualifiers, “risk-adjusted” and “net of fees,” could help to ameliorate the potentially harmful effect of this framing, but the premise itself is flawed. A more balanced definition is needed, based on understanding the financial situation and investment needs of the plan and its participants.

• The safe harbor’s list of six factors common to most investments that might be included on a plan menu, while reasonable as far as it goes, is incomplete. Most importantly, it does not include risk among those factors that would always need to be considered.[48] Understanding the specific risks an investment poses, and how those risks relate to the situation and needs of plan participants, is a critically important part of any prudent process and deserves far greater attention than it gets here.

• The rule proposal’s inclusion of implementation examples in the rule text is problematic both structurally and substantively. Structurally, the examples are not drafted with the kind of precision needed in regulatory text. Moreover, it is not realistic to think that, even with improved drafting, it would be possible to draft a sampling of examples that are broadly relevant to the vast and ever-changing array of products a plan sponsor may consider for inclusion on a plan menu. Substantively, a number of the examples provided are poorly conceived, outlining a process that falls well short of what would be needed to make a prudent selection of investment options.

These flaws in the rule interact with each other in a way that compounds the harm. For example, inclusion of implementation examples that lower the bar for how plan fiduciaries consider cost when selecting investments, when combined with elimination of the requirement to make a sound investment decision based on any such analysis, would make it significantly more difficult to hold plan fiduciaries accountable when they add investments with excessive costs to plan menus. Similarly, including implementation examples that lower the bar for consideration of performance on the one hand and permit the use of inappropriate or unreliable performance benchmarks on the other would make it significantly more difficult to hold plan fiduciaries accountable when they select investments with a record of substandard performance. Moreover, because the proposed safe harbor is poorly conceived and inconsistently drafted, it is as likely to confuse as it is to clarify plan fiduciaries’ responsibilities when making such selections.

The end result is an unworkable rule that would fundamentally weaken the prudence standard governing plan fiduciaries’ investment selections. It is not clear that a workable rule could be drafted based on this deeply flawed concept. To do so would, at a minimum, require a thorough reworking of the proposed approach, which would then need to be reissued for public comment.

1. The proposal would eliminate the obligation to make sound investment selections.

The obligation to consider all relevant factors when selecting designated investment options is both critically important and insufficient to satisfy the prudence standard. Without an accompanying obligation to make a sound investment selection based on that analysis, the prudence standard would be rendered virtually meaningless. Yet that is precisely the effect the proposed rule would have by eliminating the obligation to “act accordingly” from its safe harbor. This is a radical departure from how ERISA’s prudence standard has traditionally been interpreted.

The preamble to the 1979 Investment Duties Regulation states, for example, that “the requirements of the ‘prudence’ rule have been satisfied if the fiduciary has acted in a manner consistent with appropriate consideration of the facts and circumstances that the fiduciary knows or should know are relevant.”[49] (Emphasis added) It goes on to state that the rule had been revised in response to comments received to “make clear that the fiduciary’s acts do not satisfy the ‘prudence’ rule solely because the fiduciary had previously given consideration to relevant facts and circumstances.” The revisions were adopted, according to the release, because some commenters had “questioned whether, under the regulation as originally proposed, a fiduciary might be deemed to be ‘immunized’ once he had given such consideration, notwithstanding the nature of his subsequent acts.”

As drafted, the rule proposal’s safe harbor would do precisely what the Department had previously sought to avoid: it would “immunize” the fiduciary from liability so long as it had considered the relevant facts. This is the sort of sweeping change in long-established regulatory policy that courts have frowned upon in recent decisions. The Department points to no legislative text in ERISA that would justify such a change in interpretation. And because the rule proposal would fundamentally alter the standard for the selection of investments in more than 700,000 participant-directed individual account plans holding, collectively, just under $9 trillion in retirement savings, according to the Department’s estimates,[50] it clearly has vast economic significance. Accordingly, the rule as currently drafted appears to be vulnerable to legal challenge.

If it is not the Department’s intention to radically rewrite the duty of prudence – eliminating the obligation to make sound investment selections – the rule must be revised to restore fiduciaries’ obligation to act in accordance with their consideration of relevant factors. Regardless of anything else the Department might do to tweak other aspects of the proposed safe harbor, failure to make this one change would result in shielding plan fiduciaries from liability for unsound investment selections that expose retirement savers to investments in their workplace retirement plans with excessive costs, unwarranted risks, and a history of poor performance.

1. The proposal includes an inappropriate definition of the purpose of the plan.

The preamble to the 1979 Investment Duties Regulation states that determinations of the appropriateness of particular investments or courses of action should be judged based on whether they “further the purpose of the plan.”[51] The Department uses that same framing in the proposed rule, further specifying that fiduciaries further the purposes of a participant-directed individual account 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.”[52] Maximizing returns – even with the helpful modifiers “risk-adjusted” and “net of fees” – is an arbitrary, and potentially distorting lens through which to view a plan fiduciary’s responsibility when selecting investment options.

The purpose of such plans is to provide employees with a tax-advantaged mechanism to save for retirement. The role of the plan fiduciary when selecting investment options for the menus of these participant-directed plans is to provide a diverse group of employees with a similarly diverse selection of prudent investment options, taking into consideration the financial situation and needs of the plan participants. While the expected return is an important factor to consider when evaluating investment alternatives, particularly how expected returns compare among available alternatives, it is not clear that maximizing returns, even risk-adjusted returns net of fees, should be the primary emphasis for all investments and all plan participants.

Moreover, “expected returns” is itself a squishy concept, and one that is prone to both error and exaggeration. Even though experts (and the securities laws) emphasize that past performance is an unreliable predictor of future performance, we tend to base our assessment of expected returns on past performance to one extent or another, with varying degrees of success. The inherent challenge of developing reliable projections of future returns is even greater in the context of certain novel investment strategies included on the list of alternative assets the rule seeks to promote, such as private funds and digital assets.

Instead of putting its thumb on the scale in favor of return maximization, the Department would better serve retirement savers by adopting a more balanced characterization of how plan fiduciaries further the purposes of the plan. For example, it could state that the fiduciary should choose investments that further the purposes of the plan to provide employees with a diverse menu of prudent investment options in which to invest for retirement, taking into consideration all relevant factors, including the financial situation and investment needs of the plan and its participants.

An approach that is grounded in the situation and needs of the plan and its participants would also be generally consistent with fundamental principles of the federal securities laws. A broker-dealer seeking to comply with Regulation Best Interest, for example, or an investment adviser seeking to comply with its fiduciary duty under the Investment Advisers Act start with an obligation to know the customer. Because an investment that is right for one investor may not be a good match for another investor whose circumstances differ, obtaining a detailed understanding of the customer’s financial situation and needs is considered essential to determining whether a particular investment or investment strategy is in their best interest.

The same concept would seem to be applicable here. In this case, however, the “customer” would be the plan and its participants. As discussed in the proposing release, plans vary greatly in size and in the characteristics of plan participants (e.g., age, turnover rate, income, education, financial sophistication, and net worth). These differences among plans can have a significant effect on determinations of which investments would best serve the purposes of the plan. As just one example, the investments that further the purposes of a plan for a small company with young, financially inexperienced, middle income employees are likely to be very different from the investments that would further the purposes of a plan for a large financial services firm with a highly compensated, financially sophisticated workforce.

That notion of taking the characteristics of plan participants into account is reflected in some, but not all, of the proposed rule’s implementation examples. It deserves greater prominence. One way to give it that prominence would be to incorporate it into the discussion of how plan fiduciaries further the purposes of the plan. Another would be to make the characteristics and needs of the plan and its participants a separate factor that would generally need to be considered when selecting an investment. At the very least, the discussion of each of the generally applicable factors should make clear that the analysis of that factor needs to be rooted in an understanding of its relationship to the situation and needs of the plan and plan participants.

1. The proposed list of factors that would generally need to be considered in any investment selection is incomplete.

Consistent with how the prudence standard has long been understood, the proposal states that, when selecting investment options, fiduciaries must “objectively, thoroughly, and analytically” consider all “relevant factors.”[53] The proposed rule then lists six factors that the Department believes would be relevant factors for most investments that would be included in a participant-directed, defined contribution plan. Those factors are: performance, fees, liquidity, valuation, performance benchmark, and complexity. We agree that each of these factors is appropriately included on the list of generally relevant factors.[54]

There is one glaring omission from the list of generally applicable factors, however, and that is investment risk. While risk is included as a consideration in three of the six factors on the list – performance, liquidity, and valuation – the topic is much broader. For example, a guide to different types of investment risk from the National Council on Aging includes five types of systemic risks and six types of non-systemic risks.[55] That guide is written for a lay audience; investment professionals can be expected to bring a more in-depth and nuanced consideration to the topic when making investment selections for different types of clients with differing investment needs.

The point here is not that each different type of risk should be included among the safe harbor’s list of generally relevant factors, and certainly not that investments that carry these risks are inherently imprudent. Rather, the point is that risk varies greatly from investment to investment and from investor to investor. What’s relevant when considering the risks of a lifetime income investment, for example, is likely to be very different from what’s relevant when considering the risks of a fund that invests in cryptocurrency, a mutual fund that tracks a stock or bond index, or a collective investment trust (CIT) with significant holdings of private equity and private debt. Moreover, even within the limited context of saving for retirement, the risks that are most relevant to young employees and employees nearing retirement are likely to be very different, as are the risks that are most relevant to employees who are barely making ends meet and those with a comfortable income and substantial net worth.

Plan fiduciaries need to understand those differences in order to make prudent investment selections that further the purposes of the plan. Instead of reducing risk to one aspect of how other relevant factors are considered, the rule proposal should make clear that a prudent evaluation of an investment option would require an understanding of the particular risks of that investment and how those risks relate to the situation and needs of the plan and its participants.

1. The proposed regulatory approach of incorporating explanatory text and implementation examples in the rule text is unworkable.

To survive the test of time, regulatory text should be carefully worded and, to the extent possible, broadly applicable. The explanations and examples included in the proposed rule text are neither. As such, the proposed rule’s novel approach of incorporating guidance in rule text is unworkable, raising as many questions as it answers. It is not within the scope of this analysis to provide a comprehensive list of the many places where the rule text is unclear, internally inconsistent, or inconsistent with past Department policy. Instead, this section highlights a few such examples that go to the heart of how plan fiduciaries can fulfill their prudence obligations under the rule.

At a bare minimum, before finalizing a rule, the Department would need to carefully scrub the language of all such issues. Ultimately, however, it seems unlikely that the Department will be able to achieve, in this kind of explanatory text, the precision and clarity needed in rule text. A better solution would be to move the explanatory text, including implementation examples, out of the rule text and into the preamble. Regardless of the approach it chooses to take, and given the importance of some of the questions raised, the Department should issue the revised text for comment before a rule is finalized. Failure to do so could leave the rule vulnerable to procedural, as well as substantive, challenges.

• The proposed rule is unclear regarding the scope of deference courts are meant to give fiduciaries’ decisions about which factors to consider when selecting an investment.

The decision about which factors to consider when selecting investment options is a critically important part of a prudent process. The rule provides a list of six factors that plan fiduciaries must, when applicable, “objectively, thoroughly, and analytically consider.” Although the rule describes the six factors as a non-exhaustive list, it also states that a fiduciary that follows the process described in paragraphs (g) through (l) – the paragraphs devoted to consideration of those six factors – is “presumed to have met the duties under section 404(a)(1)(B) of ERISA” and “is entitled to significant deference.”

This raises questions about how courts are to consider the decisions fiduciaries make about which factors to consider. If the fiduciary considers only the six factors discussed in the proposed rule, are courts expected to presume, as the language could be read to suggest, that the fiduciary, in limiting its analysis to those factors, has met its duties? If not, how are courts meant to weigh whether those six factors were the only relevant factors? Conversely, since the six factors are to be considered “when applicable,” if a fiduciary determines that one or more of the factors is not relevant to a particular investment, is that decision accorded deference under the proposed safe harbor?

If the Department intends that deference be given only to fiduciaries’ analysis of those six factors, and not to decisions regarding which factors should be considered, it needs to make that clear. If it intends to accord deference to fiduciaries’ decisions about which factors are relevant, it needs to clarify on what basis those decisions would be entitled to deference. If the Department fails to provide that clarification, plaintiffs’ attorneys are like to seek clarification in court. The issue is of sufficient significance, moreover, that further elaboration on the point should be issued for public comment.

• The proposed rule is unclear regarding the types of outside experts that can assist plan fiduciaries in selecting investment alternatives under the safe harbor.

An underlying assumption of the rule proposal is that plan fiduciaries, particularly small plan fiduciaries, will often need to rely on outside professionals to assist with the analysis of investment options required to qualify for the safe harbor. However, the rule is inconsistent in how it refers to those outside experts, and that lack of consistency could lead to confusion and expose plans and plan participants to conflicted advice.

In most cases where the issue arises, the proposal states that plan fiduciaries can “rely on the recommendations of a prudently selected investment advice fiduciary within the meaning of section 3(21)(A)(ii) of ERISA” or can prudently delegate compliance “to an investment manager within the meaning of section 3(38) of ERISA.” In the case of considering complexity, however, the rule proposal suggests that the plan fiduciary would need to consider whether it “must seek assistance from a qualified invest advice fiduciary, investment manager, or other individual.”[56] (Emphasis added) In other instances, the rule proposal states that the plan fiduciary may want to consult a “qualified professional.”[57]

In adopting different terminology, is the Department drawing a deliberate distinction between instances in which a plan fiduciary could only rely on advice or recommendations from a prudently selected investment advice fiduciary, as that term is defined in ERISA, and instances in which plan fiduciaries could rely on assistance from other individuals or entities that are not acting in a fiduciary capacity? If so, on what basis is it drawing that distinction? On what other types of individuals could plan fiduciaries rely and still qualify for the safe harbor? The issue is not clearly addressed in either the rule text or the preamble.

The question takes on added importance in light of the recent restoration of the “five-part test,” strictly limiting the circumstances in which a financial professional or entity is acting as an investment advice fiduciary when making recommendations to plans. If a plan fiduciary is getting advice or recommendations from a broker, insurer, or fund manager on a one-time basis, for example, or in the absence of a mutual agreement that the advice or recommendations are the primary basis for the investment selection, that would generally not appear to constitute fiduciary advice under the five-part test. Could plan fiduciaries still rely on such advice and recommendations when selecting investments and qualify for the safe harbor? If so, under what, if any, limitations?

If the Department intends to draw a distinction here between situations in which the plan fiduciary could only rely on a 3(21) advice fiduciary or a 3(38) investment manager to qualify for the safe harbor and situations in which it could rely on a broader array of outside experts, it needs to clarify the nature and basis for that distinction. If the Department does not intend to draw such a distinction, it should ensure that the language it uses throughout is consistent with its intent. Ideally, it should make clear that, to qualify for the safe harbor, plan fiduciaries can only rely on advice from a prudently selected fiduciary. Given the consequence of the issue, a discussion of the basis for the Department’s proposed approach should be issued for public comment.

• The proposed rule is unclear with regard to the degree to which plan fiduciaries can rely on these outside experts.

The proposed rule provides a number of implementation examples in which an investment advice fiduciary presents the plan fiduciary with information or advice on a particular topic, such as risk measures or liquidity, and the plan fiduciary relies on that information or advice in selecting the investment option. In some cases, the rule proposal specifies that the plan fiduciary must critically review and understand the information.[58] In others, it suggests that the plan fiduciary can simply rely on the advice or information, without specifying a need to understand it.[59] In no case does it suggest that the plan fiduciary must take steps to determine whether the information or advice can reasonably be relied on.

Traditionally, ERISA has been interpreted as not allowing plan fiduciaries to rely blindly on the advice of an investment advice fiduciary.[60] By including a requirement to critically review and understand information provided by outside experts in some instances, and omitting it in others, the rule proposal raises questions about whether the Department is proposing to change that policy. As drafted, the proposed regulation seems to suggest that there may be circumstances in which plan fiduciaries can blindly rely on information and advice from outside experts without full understanding. It suggests, moreover, that this is the case not only for advice from a prudently selected advice fiduciary, but also for advice and information from other professionals not acting in a fiduciary capacity.

Furthermore, as discussed above, the rule suggests that plan fiduciaries may be allowed to rely on advice from non-fiduciaries in certain instances. And it explicitly permits plan fiduciaries to rely on written representations with regard to liquidity and valuation from investment managers that are clearly subject to significant conflicts of interest. Yet the proposal says nothing about the steps plan fiduciaries would need to take, when relying on advice or information from conflicted sources, to ensure that the conflicts will not result in harm to plan participants. Here again, the Department seems to be departing from, and watering down, traditional interpretations of ERISA’s fiduciary standard.

If it truly is the intent of the Department to allow this sort of blind reliance on outside experts, then the Department needs to explain the justification for such a sweeping policy change. That explanation would need to be reissued for public comment. If, as we hope, that is not the Department’s intent, then the proposed rule needs to be consistent in how it discusses this topic. Specifically, it should make clear throughout that plan fiduciaries that have not delegated compliance to a prudently selected 3(38) fiduciary can only rely on advice and information that they themselves have critically reviewed and understood.

• The implementation examples are too narrowly focused to provide useful guidance for the majority of alternative assets the rule is intended, at least in theory, to promote.

The inclusion of explanatory text and implementation examples in the rule text poses additional problems that may be even more difficult to surmount. As noted above, to stand the test of time, regulatory text must not only be clear, it must also be broadly applicable. But the implementation examples provided in the rule text are quite narrow in focus. It is not at all clear how the principles contained in those examples would apply to the majority of alternative assets discussed in the preamble to the rule or the Executive Order on which the rule is based.[61]

One possible explanation for the narrow focus of the examples is that the Department, despite having chosen to propose a safe harbor that would be available for all types of investments, is trying to steer how the rule is implemented. In other words, it may be that the narrow scope of its examples is intended to be a self-fulfilling prophecy. If this is the case, its choice of examples strongly suggests that its preferred outcome is that alternative assets be added to investment menus through inclusion in diversified funds, rather than as standalone investments, and that plan menus provide more investments that include a lifetime income component.[62] There is support for this possibility in the proposing release. The regulatory impact analysis states, for example, that the Department “anticipates that the main channel through which this proposal would lead to greater defined contribution plan investment in alternative assets would be within target date funds.”[63]

But the Department cannot safely assume that implementation of the rule will be so narrowly constrained, particularly when the safe harbor itself is written to be universally applicable and a broader range of investments are pushing for access to retirement accounts. For example, Bitcoin and Ether have already been added to some plan menus. If the rule is adopted, it is likely to further speed the addition of digital assets to plan menus. After all, actively managed investment vehicles that are invested in digital assets are specifically mentioned in the EO among the alternative assets it is intended to promote. But none of the examples included in the proposed rule address how plan fiduciaries might apply the six factors to these products.

How are plan fiduciaries, and courts, to read that silence? For example, having previously raised concerns about the reliability and accuracy of cryptocurrency valuations, among other things,[64] does the Department have new guidance to offer on how those concerns could be addressed through a prudent process? If so, why is it not included here? If not, are these funds effectively precluded from relying on the safe harbor? Or, worse, are they free to extemporize when it comes to considering factors such as reliability of valuations, secure in the assumption that courts, and the Department, will defer to their analysis?

As a partial, but essential, cure for the types of shortcomings highlighted here, the Department should follow a more traditional approach to rulemaking and move the explanatory text, including implementation examples, out of the rule text and into the preamble. The Department would still need to review the text for inconsistencies and lack of clarity and release those revisions for public comment. Such an approach would have the added benefit of giving the Department greater flexibility in the future to address questions that arise and provide updated information on the applicability of the rule as markets evolve without having to continually propose and seek comments on revisions to the rule text itself.

1. Some of the implementation examples included in the rule text fall well short of what would be needed to support a prudent investment selection.

The implementation examples included in the rule text vary in quality. In a number of cases, however, the analysis that would be deemed to pass muster falls well short of what is needed to make a prudent investment selection. Following are a few such examples. Here again, because it is not within the scope of this analysis to provide a comprehensive list, this list focuses on a few topics that are critically important to how plan fiduciaries fulfill their duties.

• The rule proposal’s explanation of what constitutes comparison to a “reasonable” number of alternatives is inadequate.

In discussing how plan fiduciaries meet their obligations to consider two of the six factors – investment performance and fees – the rule proposal states that the fiduciary would need to compare the investment under consideration to “a reasonable number of similar investment alternatives.” The proposing release further states that, “Whether alternatives are similar, and what constitutes a reasonable number of them, are questions of fact and dependent on the specific facts and circumstances of each case.” It adds that neither the proposed rule nor ERISA’s duty of prudence “require a fiduciary to compare an investment alternative with every similar alternative available in the market.”[65] So far, the standard appears generally consistent with how the same concept is interpreted under the securities laws.

However, that apparently reasonable standard is entirely undermined by the implementation examples, which suggest that the standard can be met through a comparison to a handful of randomly selected alternatives even when better information is readily available. Specifically, the examples maintain that it would be sufficient to compare the performance of just three target date fund series and the fees of just five stock index funds to satisfy the safe harbor. It ignores the fact that, in both cases, tools are readily available that would enable plan fiduciaries to determine how a particular target date fund’s past performance or an index fund’s fees generally measure up against its competitors.

Worse, the rule proposal places no limits on the characteristics the investments used for comparison would need to have to qualify for the safe harbor. Instead, as drafted, these implementation examples suggest that it would be sufficient to compare the three worst performing target date fund series or the five highest cost index funds to satisfy the obligation to compare the performance and fees of a reasonable number of alternatives. If this clearly inadequate interpretation were allowed to sand, it would eviscerate the obligation to consider cost and performance when making investment selections.

The Department could send the message that plan fiduciaries can meet their obligations by comparing performance and costs to a reasonable number of alternatives and do so without undermining the prudence standard. To achieve that goal, however, the examples would need to be completely reworked to make clear that comparison needs to be rigorous, taking into account the best readily available information, and that it is not enough to select the best of the worst available alternatives. Failure to make those changes would seriously undermine the prudence standard and its ability to shield retirement plan participants from excessive costs and persistently under-performing investments.

• Implementation examples downplay the importance of minimizing costs when selecting designated plan investments.

The proposed regulation appears on the surface to require serious consideration of costs when selecting plan investment options. It includes fees among the six factors plan fiduciaries would generally need to consider when selecting investment options, and it indicates that performance should be considered in terms of expected returns, net of fees.

Here again, however, these positive aspects of the rule proposal are undermined by implementation examples chosen to downplay the importance of minimizing costs. While the proposing release includes five examples of how a plan fiduciary can satisfy its obligations to consider investment fees and costs, only the share class example describes a situation in which higher costs would not be justified. As noted above, in several of the examples the analysis required to justify those higher costs is flimsy at best, suggesting that virtually any explanation could be seized on to justify higher costs.

It is certainly the case that higher costs are sometimes justified based on benefits the higher cost options deliver to investors. But it is equally true that, all else being equal, investors are better off keeping costs low. Over the long term, the difference in returns from apparently very small differences in cost can be dramatic.[66] The bar for favoring higher cost options over comparable, reasonably available lower-cost options should therefore be high. Several of the fee examples send the opposite message, that virtually any “added value” can be used to justify higher costs.

The fee example related to customer service is particularly egregious. It suggests that it would be appropriate to compare just five randomly chosen stock index funds and select the highest cost of the five funds compared based on its superior customer service ratings. The example notes that the cost difference in this case is quite small – a quarter of a basis point. Nowhere in the analysis, however, does it suggest that, if the cost difference were larger, the higher costs might not be justified. It doesn’t suggest that the plan fiduciary, if it places a high value on customer service, should seek to determine whether lower cost options are available with similarly high customer service ratings. Nor does it provide any insight with regard to the basis on which the plan fiduciary “determined that the higher fees and expenses are appropriate considering the value of increased customer service and communication.”

The point here is not that plan fiduciaries would never be justified in selecting an investment option based on a non-pecuniary factor, such as customer service. However, the Department has previously suggested that investments should be selected based exclusively on financial criteria that the fiduciary prudently determines have a material effect on the risk or return of an investment. If it now intends to reverse or soften that position, the Department needs to better explain the extent of, and its rationale for, such a change.

Another of the proposed fee examples – in this case, on how a plan fiduciary could meet its obligation to consider the cost of adding a lifetime income benefit to an existing plan – is similarly deficient. The only concrete cost comparison included in this example is to one, otherwise comparable, investment alternative already on the plan menu that does not include a lifetime benefit. In support of its conclusion that the higher costs are warranted in this case, the example includes consultation with an investment advice fiduciary that “analyzes the annuity market generally.” But the example offers no guidance on what that analysis might consist of or how the fiduciary would determine, based on that analysis, that the lifetime benefit “provides commensurate value for the fees charged.”

The addition of lifetime income benefits to plans is an important topic, and it is certainly reasonable to suggest that this added benefit may come at an increased cost. But, given the extremely wide range in both costs and features of lifetime income products available to choose from, the topic cannot stop there. At the very least, the example should make clear that it is not enough to justify the cost based on comparison to an alternative that does not include a lifetime income benefit. Rather, to satisfy the requirement to compare costs to a reasonable number of similar alternatives, the plan fiduciary should be required to consider whether there are reasonably available alternatives that would provide a comparable lifetime income benefit at a materially lower cost. If that’s what the Department intends, with its reference to analyzing the market generally, it needs to make that much clearer. Without that clarification, this example risks being used to justify the addition of high-cost lifetime income products to plan menus on the grounds that their higher costs are inherently justified, because the lifetime income benefit provides a value to plan participants, without regard to whether similar products that offer the same added value are available at much lower costs.

In addition to strengthening the cost examples along the lines discussed above, the proposed rule should make much clearer throughout that any benefits used to justify added costs must accrue to plan participants, rather than to the plan sponsor, and must be justified based on the financial characteristics and needs of the plan participants and not some theoretical “added value.”

• The proposal allows plan fiduciaries to rely on written representations of investment managers to assess investment liquidity risk management without independently assessing the reliability of those representations.[67]

If plans increasingly add investments to plan menus with exposure to illiquid alternative assets, as the EO encourages and the proposal anticipates, ensuring that those investments have sound liquidity risk management programs in place is critically important to protect the interests of plan participants. The proposed rule appropriately includes liquidity among the six factors plan fiduciaries would generally be required to consider when selecting investment options, and the discussion of the issue is generally sound:

• It puts front and center the notion that liquidity must be evaluated in terms of the needs of both the plan and its participants.
• It acknowledges that, though retirement is generally considered a long-term goal, there are many reasons why plan participants may need immediate liquidity, including retirement, separation from service, financial hardship, and asset reallocations to other designated investment alternatives.
• And it states that plan fiduciaries “must give consideration to the potential for such events when selecting designated investment alternatives, especially qualified default investment alternatives … for a plan investment menu.”

In this case, however, an otherwise sound discussion of liquidity is seriously undermined by an implementation approach that places heavy reliance on inadequately verified written representations from conflicted investment managers.

Specifically, when considering CITs or other investments not subject to the Investment Company Act of 1940’s liquidity risk management rules, plan fiduciaries can satisfy the terms of the safe harbor by: 1) obtaining a written representation from the person responsible for managing the investment that the designated investment alternative has adopted a liquidity risk management program that is “substantially similar” to a program that meets the requirements of the Act, and 2) reading, critically reviewing, and understanding the written representation, consulting a “qualified professional,” where appropriate, 3) so long as the fiduciary does not know, or have reason to know other information “that would cause the fiduciary to question the written representation.” This approach is offered as an alternative to conducting independent due diligence, but there are similar shortcomings in this approach.

“Substantially similar” is a vague standard which the proposing release does nothing to clarify. Furthermore, investment managers seeking access to plan menus have a strong incentive to put their liquidity risk management practices in a positive light. Yet none of the related implementation examples helps to clarify what, if any steps, plan fiduciaries would need to take in order to reasonably rely on the manager’s written representations. Instead, the examples set a low bar, that the plan fiduciary not “know, or have reason to know,” information that might cause them to question the reliability of the representations.

The only guidance the proposing release offers on this important point is relegated to a footnote in the preamble to the rule, which describes some steps the Department believes to be “important parts of a fiduciary’s evaluation.”[68] While the examples included in that footnote are good, as far as they go, none of the examples provided in the rule text are conditioned on the fiduciary’s having conducted that type of analysis. Furthermore, the release says nothing about the steps plan fiduciaries would need to take to ensure that the investment manager’s conflicts of interest do not result in harm to plan participants. As such, the rule proposal is likely to result in plan fiduciaries relying on overly optimistic representations from conflicted investment managers regarding the quality of the liquidity risk management programs, putting plan participants at risk.

• The examples for assessing investment valuations fail to adequately address the inherent challenges of determining the reliability of valuations for certain alternative investments.

Many alternative investments, including private funds and digital assets, are notoriously difficult to value. In selecting investment alternatives with exposure to such assets, however, the rule proposal would permit plan fiduciaries to rely on written representations from the investment manager “that the securities for which there is not a generally recognized market are valued through a conflict-free, independent process no less frequently than quarterly, according to procedures that satisfy the Financial Accounting Standards Board Accounting Standards Codification 820, titled Fair Value Measurements (or any successor standard).” As above, the plan fiduciary could rely on these written representations unless they know, or have reason to know, information that would cause them to consider the representations as unreliable.

Meanwhile, as a number of private credit funds have been flooded with redemption requests, questions have increasingly been raised about the reliability of valuations based on those rules. These issues are described in a recent series of Wall Street Journal articles describing how fund managers rely on loopholes in the accounting standards to obscure or manipulate valuations.[69]  Usually, when a fund invests in the shares of another fund, the shares of those other funds must be marked at fair value on the balance sheet. But the rules make an exception for investors holding stakes in private-asset funds. Moreover, fund managers are “often allowed to keep using the reported [Net Asset Value] figures even if they know they are out of date or weren’t measured properly.” In those scenarios, the accounting rules say the investment manager “shall consider whether an adjustment” is necessary. But the rules don’t require managers to do anything more than consider it.” The Journal uncovered examples where funds have exploited the “NAV loophole” in the accounting rules “to record spectacular paper gains” by “buying stakes in private-equity funds at big discounts on the secondary market” then immediately marking up the holding to its stated NAV.

In light of these serious shortcomings in the accounting rules as they relate to valuations of private funds, plan fiduciaries cannot reasonably assume that valuations based on these rules are reasonable without additional due diligence. Among other things, the plan fiduciary would need to understand whether an investment fund it is considering is relying on NAV to value its holdings of private funds or is basing those values on prices that would be available if the investor had to sell. Plan fiduciaries should also determine whether the investment fund in question makes it easy to discover how much each of its private fund holdings originally cost and how that compares to its most recent carrying value.[70] A fund’s failure to make that information readily available should be viewed as a red flag.

As the Department has previously acknowledged, determining whether the valuations of certain digital assets are reliable may be even more challenging. If retirement plan participants are to be exposed to the valuation risks inherent in these and other alternative assets, the Department needs to do more to ensure that plan fiduciaries understand and are carefully weighing such risks. The proposed implementation approach included in the safe hard does not meet that standard.

• The rule proposal encourages the use of potentially unreliable benchmarks when comparison to more traditional benchmarks would better serve the needs of investors.

The proposed rule would require plan fiduciaries to compare the risk-adjusted expected returns of a designated investment alternative to an appropriate benchmark. Comparing performance to an appropriate benchmark is an important aspect of how plaintiffs establish loss causation when bringing fiduciary claims.[71] Accordingly, consideration of appropriate benchmarks is an important factor for plan fiduciaries to weigh when selecting investments. Unfortunately, there are several problems with the rule’s proposed approach.

First, benchmarks are typically used to help illustrate how an investment’s past performance has compared to that of a particular market or other generally comparable investments. It is difficult to see how “expected returns” could be compared to such a benchmark. The Department addresses this by equating “risk-adjusted expected returns” with historical performance. As noted above, however, experts generally agree that past performance is an unreliable predictor of future performance. As drafted, however, the proposed rule would allow plan fiduciaries to equate past performance with expected returns without even cautioning them to consider whether those past returns were obtained under similar conditions to those expected going forward.

Moreover, the proposal suggests that an appropriate benchmark is one that closely tracks the investment strategy of the selected investment. As the proposing release acknowledges, however, alternative assets often lack “a well-defined benchmark. Even when using an alternative index, the underlying assets within the index are often not easily investable, meaning that an asset manager would not be able to easily invest in the same underlying assets and could not replicate the index.”^[72] The fact that the alternative indices relied on by alternative assets are generally “not investable [limits] their applicability to how incorporating alternative assets may actually affect risk-adjusted returns.” And, as the proposing release further notes, benchmarks for private funds can be particularly problematic, since “private equity and hedge fund data is reported voluntarily to indices,” with the result that such indices are more likely to reflect better performers, as they have an incentive to report, and failed funds are removed from indices, “creating an inherent survivorship bias that over-weights better performing funds.”[73]

But these cautions about the limited value of certain types of benchmarks are relegated to the regulatory impact analysis. They do not appear in the plan’s discussion of how to select an appropriate benchmark to satisfy the safe harbor. Instead, the rule proposal seems to favor the adoption of bespoke benchmarks, including in situations where comparison to a more traditional benchmark would appear to make more sense. This is evident in the example regarding an asset allocation fund with a private equity sleeve, where the plan fiduciary complies by using a benchmark specifically created for that purpose by a prudently selected investment advice fiduciary. Such a benchmark, if well-constructed, may provide useful information about the expected performance of the fund. In light of the limitations highlighted by the Department in its regulatory impact analysis, however, we would expect the rule to urge greater caution in relying on such indices.

Moreover, an index that simply compares performance to a hypothetical allocation designed to closely match that of the fund under consideration wouldn’t appear to tell the plan fiduciary much, if anything, about the expected performance of that fund in comparison to other available funds that seek to achieve similar investment goals but that do so pursuing strategies that do not include the private equity exposure. Given the added costs, liquidity risks, and valuation challenges associated with private equity exposure, a critically important question for the plan fiduciary in making a prudent selection of such a fund would be whether the fund offers a value to plan participants that justifies those added risks. Comparison to a broader benchmark of funds with similar investment goals, but that adopt different strategies to achieve those goals, would appear to provide better information in that regard.

In addition to revising its benchmark examples to address these shortcomings, the Department should consider whether the consideration of performance benchmarks is best treated as a separate factor, as it is here, or whether it would be better to incorporate the appropriate use of benchmarks as one aspect of a plan fiduciary’s consideration of performance.

1. The potential effect of the rule on default investments raises particular concerns.

As the proposing release acknowledges, “target date funds play a vital role in retirement plans.”[74] Data cited in the proposing release suggests that somewhere between 85 and 90 percent of large plans include a target date fund on their investment menu.[75] While the funds are somewhat less common among plans with fewer than 50 participants, roughly two-thirds of these plans also include a target date fund on their menu. Moreover, as discussed above, target date funds are widely used as default investments and are the largest recipient of participant funds. Employees who are automatically enrolled in these investments when joining the plan are less likely to carefully review material about the investment’s risks, costs, or past performance, let alone its liquidity risk management.

The selection of such investments by plan fiduciaries therefore warrants particular caution, caution that is not reflected in a rule proposal that has as its primary objective expanding access to alternative assets. The benefits of increasing plan participants’ exposure to alternative investments are speculative. As the proposing release itself acknowledges: “While the return and risk characteristics of public equity and debt are generally well understood and easily implemented into a portfolio, alternative assets are highly variable.”[76] Even defined benefit plans, which are managed by teams of highly trained financial professionals and often have privileged access to information, have experienced “mixed results.”

Only time will tell whether funds with exposure to private assets that are available for inclusion on fund menus have adopted adequate valuation models or liquidity risk management programs in light of that exposure. Even greater caution is warranted for investments with exposure to loosely regulated digital assets. Experiments expanding plan participants’ exposure to alternative assets, if they are undertaken at all, would therefore best be reserved for investment options that are not used as default investments by the retirement plan.

Instead, the rule proposal actively encourages the use of such strategies in target date funds, and it predicts that target date funds will be the primary vehicle through with plan participants will gain such exposure. This puts the retirement savings of millions of Americans at risk. Instead of rushing ahead with this broadly applicable proposal, the Department would better promote the interests of plan participants by delaying applicability of any such safe harbor to the qualified investment options used as default options on plan menus.

1. The rule proposal could expose small plans to increased costs without providing commensurate benefits.

As discussed above, small plans, which make up a large majority of plans, face little if any litigation risk today. As a result, they are unlikely to draw any direct financial benefit from the proposed safe harbor. Moreover, the vast majority of small plan fiduciaries are unlikely to have either the time or the financial expertise to conduct the analysis needed to qualify for the safe harbor.[77] This reality is reflected in the rule proposal, which repeatedly suggests that these plan fiduciaries may need to rely on advice from outside professionals in order to comply. But that outside counsel comes at a cost that many small plans may not be able to afford.

One possibility for these plans is that they will be largely unaffected by the proposed rule, continuing to offer a diversified menu of traditional investment options well suited to their plan participants. A second possibility is that small plans could be indirectly affected by the rule, as available investment options are redesigned to add exposure to alternative assets. This is how small plans are most likely to “benefit,” according to the proposing release.[78] In many cases, this is likely to occur without the small plan fiduciary or plan participants understanding the implications of those changes. Whether plan participants actually benefit in this instance will depend on the quality of the investment options made available by service providers, something the rule proposal does too little to ensure.

A third possibility, however, is that the rule proposal creates the expectation that plans must add access to alternative investments in order to fulfill their fiduciary duties. If that proves to be the case, the only realistic compliance option for smaller plans may be delegating compliance to a 3(38) fiduciary, something only an estimated 25 percent of plans do today.[79] This could result in at least modestly increased costs for plans that currently get advice from a 3(21) fiduciary, and significantly increased costs for plans that don’t currently rely on outside fiduciary advisers.[80] Research shows that the cost associated with establishing and administering a plan is a key reason many small companies choose not to offer a plan.[81] To the degree that the proposed rule drives up such costs by forcing greater reliance on outside professionals, it could further discourage small companies from offering this important benefit to their employees.

Conclusion

The Department attributes the scarcity of alternative assets in defined contribution plans to an epidemic of litigation in order to justify its proposed regulatory approach. In reality, however, it is only relatively recently that alternative asset managers have begun to show a serious interest in serving the defined contribution plan market. There are practical reasons why “many alternative asset managers have historically viewed the back-office infrastructure required to administer many small accounts as not worth the effort.”[82] These include the significant challenges of reconciling the irregular distributions, limited liquidity mechanisms, and quarterly valuations of typical private fund structures with the daily liquidity needs of plans and plan participants.

As the growth of the private fund market has outpaced the investment capacity of institutional investors, however, financial services firms’ incentive to overcome these challenges and develop products that are adapted to this multi-trillion-dollar market has grown. So far, such investments have largely taken the form of “pooled, professionally managed funds, such as target date funds or managed accounts,” according to the proposing release.[83] Plan fiduciaries who wish to add such investment options to their plan menus already have the ability to do so, in reliance on the “safe harbor” provided by the 1979 Investment Duties Regulation, and some plans have already taken advantage of that opportunity.[84]

The proposing release notes that uptake of these alternative investments has nonetheless been slow, and has been limited to “the largest defined contribution plans with significant resources to conduct due diligence.”[85] Smaller plans, meanwhile, “have generally avoided including these investments in their line-ups, as evaluating the offerings to ensure they meet valuation and liquidity requirements, finding appropriate benchmarks, and justifying complex fee structures has been extremely challenging.”[86]

The Department therefore finds itself in something of a quandary in meeting the demands of the EO to expand access to alternative assets in participant-directed individual account plans. They cannot reasonably suggest that plan fiduciaries should be held to a lower standard of care when selecting alternative investments, yet the challenges of evaluating these investments remain well beyond the capabilities of most plan fiduciaries. The Department has responded to this challenge by proposing a new safe harbor that purports to be based on traditional interpretations of the prudence standard, but that in reality applies a seriously weakened interpretation of how plan fiduciaries can fulfill their duty of prudence when selecting all types of investment options.

The proposal delivers a one-two punch to the prudence standard: First, it would eliminate the requirement that a plan fiduciary act in accordance with its consideration of the relevant factors when selecting investments for plan menus. As a result, plan fiduciaries who have prudently considered the relevant factors would be deemed to have satisfied their duty with respect to those factors and would be entitled to significant deference, apparently without any separate inquiry into whether their selections are sound, or even consistent with that analysis. Second, it suggests, in its examples of how plan fiduciaries could meet their obligations that even the most superficial analysis of these factors, based in some cases on conflicted advice and representations, would suffice to immunize the plan fiduciary from liability.

In the nearly 50 years since the first 401(k) plan was established, we have seen enormous strides in workers’ access to retirement plans, in the operation of those plans, and in the quality of investments offered through those plans. The existence of a strong fiduciary standard governing investment selections has been critical to that success. This proposed rule – by striking at the heart of the fiduciary standard – threatens to undo that progress by corrupting the process through which plan fiduciaries choose the investments millions of Americans rely on to fund a secure and dignified retirement. For all of the reasons discussed above, the rule proposal should be withdrawn.

Respectfully submitted,

Barbara Roper

Senior Fellow
Consumer Policy Center

[1] Fiduciary Duties in Selecting Designated Investment Alternatives, Department of Labor, Employee Benefits Security Administration, Federal Register, Vol. 91, No. 61, March 31, 2026, p. 16088-16144.

[2] See, Executive Order 14330, Democratizing Access to Alternative Assets for 401(k) Investors, August 7, 2025, https://www.federalregister.gov/documents/2025/08/12/2025-15340/democratizing-access-to-alternative-assets-for-401k-investors. The order defines alternative investments to include: (i) private market investments, including direct and indirect interests in equity, debt, or other financial instruments that are not traded on public exchanges, including those where the managers of such investments, if applicable, seek to take an active role in the management of such companies; (ii) direct and indirect interests in real estate, including debt instruments secured by direct or indirect interests in real estate; (iii) holdings in actively managed investment vehicles that are investing in digital assets;

(iv) direct and indirect investments in commodities; (v) direct and indirect interests in projects financing infrastructure development; and (vi) lifetime income investment strategies including longevity risk-sharing pools.

[3] Department of Labor, History of EBSA and ERISA, https://www.dol.gov/agencies/ebsa/about-ebsa/about-us/history-of-ebsa-and-erisa.

[4] Department of Labor, Fiduciary Responsibilities, https://www.dol.gov/general/topic/retirement/fiduciaryresp#:~:text=The%20Employee%20Retirement%20Income%20Security%20Act%20(ERISA),made%20through%20improper%20use%20of%20plan%20assets.

[5] ERISA, Section 404(a)(1)(B).

[6] However, it was not until the Revenue Act of 1978 was implemented, with rules permitting salary deferrals via payroll deductions to fund the plans, that the first 401(k) plans were developed. See, e.g., Investment Company Institute, 401(k) Plans: A 25-year Retrospective, Research Perspective Vol. 12, No. 2, Nov. 2006, https://www.ici.org/system/files/attachments/per12-02.pdf.

[7] Proposing Release at FR 16111.

[8] American Academy of Actuaries, Looking Back, Moving Forward: ERISA at 50, The Origins and Evolution of ERISA: 1974 to 2024, Webinar, May 14, 2024, https://actuary.org/wp-content/uploads/2024/12/The-Origins-and-Evolution-of-ERISA-1974-to-2024_Final.pdf.

[9] Most employers that offer a 401(k) plan match employee contributions up to a certain percent. See, e.g., Liliana Hall, How Does Your 401(k) Match Stack Up Against the Average? Money, Jan. 29, 2026, https://money.com/401k-employer-match-guide/.

[10] Lin, J. T., Bumcrot, C., Valdes, O., Mottola, G., Sarver, S., Ganem, R., Kieffer, C., & Walsh, G. (2025). Investors in the United States: A Report of the National Financial Capability Study. FINRA Investor Education Foundation, https://finrafoundation.org/sites/finrafoundation/files/2025-11/NFCS_Investor_Survey_Report_White_Paper.pdf.

[11] All respondents reported having at least some investments outside of retirement accounts, such as IRAs and 401(k)s. A large majority of these respondents (87 percent) also have investments in retirement accounts. (See footnote 2)

[12] With a defined benefit plan, it is the company offering the plan that bears the primary investment risk.

[13] Alana Benson, What Is the Average Retirement Savings by Age? Nerdwallet, Feb. 25, 2026.

[14] This is based on the median account size. The average account size for these groups are $537,560 for those aged 55-64 and $609,230 for those 65-74.

[15] Plan Sponsor Council of America, Automatic Features Have Tripled in Use Since 2007, Jun. 25, 2025, https://www.psca.org/news/psca-news/2025/6/automatic-features-have-tripled-in-use-since-2007/ (reporting on Vanguard’s How America Saves report).

[16] Ibid., “When including nonparticipants, Vanguard found that employees in automatic enrollment plans saved an average of 12.1%, considering both employee and employer contributions. In contrast, employees in voluntary enrollment plans saved an average of 7.6% because of significantly lower overall participation in the plan.”

[17] National Association of Plan Advisors, Target-Date Funds Continue Strong Growth, Nov. 20, 2025, https://www.napa-net.org/news/2025/11/target-date-funds-continue-strong-growth/.

[18] Sean McCaffery, The Evolution of Qualified Default Investment Alternatives: Key Developments and Trends in 2024, Fiducient Advisors, Apr. 4, 2025, https://www.fiducientadvisors.com/research/the-evolution-of-qualified-default-investment-alternatives-key-developments-and-trends-in-2024.

[19] ICI, 401(k) Investors Benefit as Mutual Fund Fees Cut in Half, News Release, Jul. 16, 2024, https://www.ici.org/n,ews-release/24-news-401k-investors.

[20] It is worth noting that this drop in 401(k) plan mutual fund fees has occurred during the same period in which retirement plans have begun to face class action litigation challenging excessive fees. While litigation is not the sole explanation, it is almost certainly a contributing factor.

[21] ICI, IRA Investors in Mutual Funds Concentrate Their Assets in Lower-Cost Mutual Funds, https://www.ici.org/system/files/2024-07/24-ira-fees.pdf.

[22] See, e.g., Government Accountability Office, 401(K) Plans: Labor and IRS Could Improve the Rollover Process for Participants, GAO-13-30, Mar. 07, 2013.

[23] Department of Labor, US Department of Labor Restores Long-Standing Investment Advice Rule After Pair of Court Decisions Vacate 2024 Retirement Security Rule, News Release, Mar. 18, 2026, https://www.dol.gov/newsroom/releases/ebsa/ebsa20260318.

[24] See, e.g., Sanya Bahal and Emerson Sprick, Alternative Assets in 401(k)s Explained, Bipartisan Policy Center, Jul. 25, 2025, https://bipartisanpolicy.org/explainer/alternative-assets-in-401ks-explained/; Paul Mullholland, Private Assets in 401(k)s Should be Expanded, BlackRock CEO Says, American Society of Pension Professionals and Actuaries, Apr. 02, 2025, https://www.asppa-net.org/news/2025/4/private-assets-in-401ks-should-be-expanded-blackrock-ceo-says/.

[25] See, e.g., Government Accountability Office, 401(k) Plans: Industry Data Show Low Participant Use of Crypto Assets Although DOL’s Data Limitations Persist, GAO-25-106161, Nov. 19, 2024, https://www.gao.gov/products/gao-25-106161. (GAO identified 69 crypto asset investment options available to 401(k) participants. Participants may have multiple ways to access these options. Some may have access through their 401(k) plans’ core investment options. Participants may also have access to crypto assets outside these core options, through arrangements like self-directed brokerage windows.) See, also, Stephen Miller, Fidelity to Allow Bitcoin Investments in 401(k) Accounts, SHRM, Apri. 26, 2022, https://www.shrm.org/topics-tools/news/benefits-compensation/fidelity-to-allow-bitcoin-investments-401k-accounts; Matt Ryan Webber, Fidelity 401(k): How to Invest in Bitcoin for Retirement, Updated Oct. 28, 2025, https://www.investopedia.com/how-fidelity-crypto-401k-works-5324019.

[26] See, e.g., Investor and Labor Group Letter to Secretary of Labor Eugene Scalia, Jun. 24, 2020, https://consumerfed.org/wp-content/uploads/2020/06/Group-Sign-on-Ltr-Urging-Withdrawal-of-DOL-PE-Guidance.pdf (urging withdrawal of Department’s June 3, 2020 information letter concerning the use of private equity investments in designated investment alternatives made available to retirement savers through individual account plans); GAO, 401(k) Plans (GAO’s analysis of investment returns indicates crypto assets have uniquely high volatility—a measure of their riskiness to participants—and their returns can come with considerable risk… Further, GAO’s interviews with researchers and firms that develop crypto asset investment options indicate there is no standard approach for projecting the potential future returns of crypto assets.)  See, also, Alicia H. Munnell, 3 Reasons Why Bitcoin in Your 401(k) Is Still a Terrible Idea, Center for Retirement Research at Boston College, Jun. 14, 2025, https://crr.bc.edu/3-reasons-why-bitcoin-in-your-401k-is-still-a-terrible-idea/. (“Bitcoin in 401(k)s is a terrible idea.  Participants don’t understand the product, it’s a speculative and volatile investment, straying from traditional investments is unlikely to enhance returns, and it’s probably not a prudent option for 401(k)s.”

[27] See, U.S. Department of Labor, Supplement Statement on Private Equity in Defined Contribution Plan Designated Investment Alternatives, Dec. 2021, https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020-supplemental-statement; DOL, Employee Benefits Security Administration, Compliance Assistance Release No. 2022-01, 401(k) Plan Investments in “Cryptocurrencies,” Mar. 10, 2022, https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/compliance-assistance-releases/2022-01. Both documents have since been rescinded.

[28] Andy Stonehouse and Brian Anderson, How Not to Get Sued in 2026: Part 1, 401k Specialist, Feb. 19, 2026, https://401kspecialistmag.com/how-not-to-get-sued-erisa-litigation-2026-part-1/.

[29] Tibble v. Edison Int’l, 575 U. S. 523

[30] Chubb, A Surprise Twist in ERISA Class Action Trends In 2024, available at: https://www.chubb.com/content/dam/chubb-sites/chubb-com/us-en/business-insurance/fiduciary-liability/pdfs/2024-fiduciary-infographic-final.pdf.

[31] Kevin LaCroix, Guest Post: The State of ERISA Fiduciary Litigation in 2025, The D&O Diary, Feb. 17, 2026, https://www.dandodiary.com/2026/02/articles/erisa/guest-post-the-state-of-erisa-fiduciary-litigation-in-2025/. This analysis found that there were 98 class action fiduciary lawsuits against defined contribution plans in 2025.

[32] Letter from American Retirement Ass’n et al. to Lori Chavez-DeRemer, Sec’y of Labor (Dec. 4, 2025) (alleging that from 2016 through 2024, plaintiffs’ attorneys filed more than 500 ERISA ‘‘fee cases,’’ and that filings are expected to almost double from 53 new lawsuits in 2024 to an estimated 99 new lawsuits in 2025). See Proposing Release FN 30.

[33] McCoy & Hiestand, How Often Do Doctors Get Sued for Malpractice? Mar. 4, 2026, https://mhkylaw.com/how-often-do-doctors-get-sued-for-malpractice/.

[34] Chubb, A Surprise Twist

[35] Brief for Encore Fiduciary as Amicus Curiae, Parker-Hannifin Corp. v. Johnson, No. 24–1030 (U.S. May 21, 2025). See Proposing Release FN 31.

[36] Chubb, A Surprise Twist.

[37] Wallet1000. State of the 401(k), 401(k) Stats and Charts, https://www.wallet1000.com/state-of-the-401k/.

[38] Yedgarian, Vahick A. and Paudel, R., Quantitative Analysis of Damages in ERISA Fiduciary Breach Litigation, Sep. 9, 2025, Financial & Investment Planning Educator eJournal, 1–19. Available at SSRN: https://ssrn.com/abstract=5461234 or http://dx.doi.org/10.2139/ssrn.5461234.

[39] Andy Stonehouse and Brian Anderson, How Not to Get Sued in 2026: Part 1, 401K Specialist, Feb. 19, 2026, https://401kspecialistmag.com/how-not-to-get-sued-erisa-litigation-2026-part-1/.

[40] Ibid

[41] Securities and Exchange Commission, Office of Investor Education and Advocacy, Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio, https://www.sec.gov/investor/alerts/ib_fees_expenses.pdf.

[42] As discussed further below, the rule proposal’s example of the kind of cost comparison needed to satisfy fiduciary obligations is particularly weak, raising concerns that plan fiduciaries would no longer face meaningful pressure to minimize investment fees.

[43] Chubb, A Surprise Twist.

[44] Tibble v. Edison, Hughes v. Northwestern, and Cunningham v. Cornell.

[45] Yegdarian and Paudel. “The entire process of quantifying damages underscores the critical importance of a rigorous financial loss analysis, which is fundamental not only to the final remedy but also to the preliminary stages of litigation. Indeed, demonstrating a concrete financial injury is often a prerequisite for plaintiffs to establish Article III standing to bring a lawsuit in the first place (White, 2023). The complexity of this analysis arises from the need to disentangle the effects of a fiduciary breach from the background noise of general market movements. A fiduciary is not a guarantor of investment performance, and losses caused by a systemic market downturn are not recoverable. Therefore, the plaintiff’s quantitative analysis must effectively isolate the losses attributable specifically to the fiduciary’s imprudence, for instance, by showing that the plan’s investments underperformed relevant benchmarks even after accounting for market-wide trends.”

[46] From the outset, the Department avoided any suggesting that it was creating a “legal list” of investments for plan fiduciaries. See, e.g., Arthur H. Kroll and Yale D. Tauber, Fiduciary Responsibility and Prohibited Transactions Under ERISA, Real Property, Probate and Trust Journal, Vol. 14, No. 4 (Winter 1979), pp 6. 4 (Winter 1979), pp 657-682, https://www.jstor.org/stable/20781474.

[47] The rule would appear to be vulnerable to legal challenge. While the Department clearly has the authority to write safe harbors for compliance with the duty of prudence, it is not clear it has the authority to fundamentally rewrite the prudence standard itself.

[48] As discussed further below, while the proposal discusses performance in terms of “risk-adjusted performance,” and the list of factors includes two specific types of risk – liquidity and valuation risk – the topic is much broader.

[49] Pensions and Welfare Benefit Programs, 29 C.F.R. Part 2550, Rules and Regulations for Fiduciary Responsibility; Investment of Plan Assets Under the “Prudence Rule,” Department of Labor, Final regulation.

[50] The latest numbers from the Investment Company Institute put total 401(k) plan assets at more than $10 trillion. See ICI Statistical Report: The US Retirement Market, Fourth Quarter 2025), available here: https://www.ici.org/research/statistics/quarterly-retirement-market-data

[51] See Proposing Release FN 6.

[52] See Proposing Proposed Safe Harbor, Paragraph (d), Duty to act prudently when establishing a plan investment menu to maximize risk-adjusted returns.

[53] This is consistent with how the standard was interpreted in the 1979 Investment Duties Regulation. In discussing that aspect of the 1979 rule in the preamble, the Department noted that which factors would need to be considered would depend on the facts and circumstances but that, in general, “The scope of the fiduciary’s inquiry in this respect … is limited to those facts and circumstances that a prudent person having similar duties and familiar with such matters would consider relevant.”

[54] While we agree that performance benchmarks can be useful in considering performance, it is not clear why this is listed as a separate factor, rather than as one component of how fiduciaries analyze performance.

[55] Michael Snowdon, A Guide to Types of Investment Risk, The National Council on Aging, May 12, 2021, https://www.ncoa.org/article/a-guide-to-types-of-investment-risk/. The five systemic risks discussed are interest rate, market, reinvestment rate, inflation, and currency. The six non-systemic risks discussed are business risk, financial risk, credit risk, downgrade risk, liquidity and marketability risk, and event risk.

[56] Proposing Release, Paragraph (l) Complexity.

[57] See, e.g., Proposing Release, Paragraph (i) Liquidity.

[58] See, e.g., the discussion of how plan fiduciaries can prudently assess the liquidity of funds that are not mutual funds registered as an open-end management investment company with the Securities and Exchange Commission under the Investment Company Act of 1940: For investment alternatives that are not such a fund, the plan fiduciary must obtain a written representation and then read, critically review, and understand any written representation, consulting a qualified professional where appropriate.

[59] See, e.g., the first example under Performance. “The investment advice fiduciary presents various risk measures for the named fiduciary to consider, including the Sharpe Ratio, a commonly used measure to assess risk-adjusted performance, and a risk-adjusted return measure that subtracts a risk penalty from returns. The investment advice fiduciary explains these concepts and their implications to the named fiduciary that then relies on this advice to select a target date fund series that has lower expected returns but lower expected risk, as measured by volatility.”

[60] In contrast, plan fiduciaries can delegate compliance to a prudently selected investment manager (a 3(38) fiduciary).

[61] Executive Order (E.O. 14330), Democratizing Access to Alternative Assets for 401(k) Investors, Aug. 7, 2025, https://www.federalregister.gov/documents/2025/08/12/2025-15340/democratizing-access-to-alternative-assets-for-401k-investors.

[62] That would be generally consistent with the EO, which specifically discussed adding exposure to alternative assets as a component of a diversified fund. On the other hand, it would seem to be inconsistent with Department statements that its role is not to pick investment winners or losers.

[63] Proposing Release at FR 16112.

[64] DOL, Compliance Assistance Release No. 2022-01, 401(k) Plan Investments in “Cryptocurrencies,” March 10, 2022. (Rescinded, May 2025)

[65] Proposing Release, at FR 16097.

[66] Moreover, apparently small differences in fees can result in significant differences in revenue for investment providers where the level of assets invested is large.

[67] This approach of relying on written representations of investment managers also appears in examples related to valuation and complexity.

[68] Proposing Release, FN 42. “The Department is not prescribing how a fiduciary should evaluate written representations as described in this proposal’s examples. The Department believes that important parts of a fiduciary’s evaluation under the proposal would include whether the representations are consistent with the terms of the investment alternative’s organizational documents and plan’s investment agreements, whether those documents or agreements provide a degree of flexibility that effectively cuts back on the matter being represented (e.g., by permitting an investment alternative to suspend investor withdrawal rights established in its organizational documents), and whether the documents or agreements may be amended without the consent of the plan fiduciary. In some instances, a plan fiduciary may need to negotiate a separate agreement to substantiate the matters being represented.”

[69] See, Jonathan Weil, What’s a Private-Credit Fund Worth When the Money Is Locked Up? The Wall Street Journal, Apr. 3, 2026, https://www.wsj.com/finance/investing/whats-a-private-credit-fund-worth-when-the-money-is-locked-up-c93c687d. See also, Jonathan Weil, Inside a $42 Billion Private-Credit Black Box: More Black Boxes, The Wall Street Journal, Mar. 16, 2026, https://www.wsj.com/finance/investing/inside-a-42-billion-private-credit-black-box-more-black-boxes-e2523e8e?mod=article_inline; Jonathan Weil, How One Big Private-Equity Fund Makes Its Numbers Incomprehensible, The Wall Street Journal, Apr. 13, 2025, https://www.wsj.com/finance/investing/how-one-big-private-equity-fund-makes-its-numbers-incomprehensible-5268657e?mod=article_inline; Jonathan Weil, Private Credit Has an Opacity Problem, The Wall Street Journal, Mar. 16, 2026, https://www.wsj.com/livecoverage/stock-market-today-dow-sp-500-nasdaq-03-16-2026/card/private-credit-has-an-opacity-problem-Ru7ZuYrJAXViaR6wGByV.

[70] Jonathan Weil, How One Big Private-Equity Fund Makes Its Numbers Incomprehensible, The Wall Street Journal, Aug. 13, 2025, https://www.wsj.com/finance/investing/how-one-big-private-equity-fund-makes-its-numbers-incomprehensible-5268657e?mod=article_inline.

[71] Yegdarian and Paudel.

[72] Proposing Release at FR 16117.

[73] Ibid.

[74] Proposing Release at FR 16112.

[75] Ibid.

[76] Proposing Release at FR 16122.

[77] Proposing Release at FR 16106 (“Smaller plans have generally avoided including these investments in their line-ups, as evaluating the offerings to ensure they meet valuation and liquidity requirements, finding appropriate benchmarks, and justifying complex fee structures has been extremely challenging.”)

[78] Proposing Release at FR 16111. (Noting that, in contrast to large plans, which “often use in-house expertise and hire outside ERISA counsel and investment advisers to provide additional information regarding investment options as part of their regular selection and monitoring processes,” smaller plans “often rely on a service provider to design their plan’s menu. In such cases, they likely would not utilize the proposed rule directly, though they may still be affected by the proposed rulemaking because many available investment funds would be designed to comply with the safe harbor.”)

[79] Plan Sponsor Council of America, Are Plan Sponsors Outsourcing Their Investment Management? Question of the Week, Mar. 03. 2025, https://www.psca.org/news/psca-news/2025/2/are-plan-sponsors-outsourcing-their-investment-management/.

[80] Eric Droblyen, 401(k) Fee Study: What Does a Fiduciary-Grade Advisor Cost? Employee Fiduciary, Aug. 7, 2019, https://www.employeefiduciary.com/blog/what-does-a-fiduciary-grade-advisor-cost.

[81] Ted Godbout, Why Small Firms Are Less Likely to Offer a Retirement Plan, National Association of Plan Advisors, Jun. 1, 2022, https://www.napa-net.org/news/2022/6/why-small-firms-are-less-likely-offer-retirement-plan/.

[82] Gibson Dunn, DOL Proposes Safe Harbor for Selection of Designated Investment Alternatives in 401(k) Plans, Client Alert, Apr. 1, 2026, https://www.gibsondunn.com/dol-proposes-safe-harbor-for-selection-of-designated-investment-alternatives-in-401k-plans/.

[83] Proposing Release at FR 16106

[84] At the time of its adoption, the Department characterized that rule as a “safe harbor” for compliance with a fiduciary’s duty of prudence, which was satisfied if “the fiduciary has acted in a manner consistent with appropriate consideration of the facts and circumstances that the fiduciary knows or should know are relevant.” See, Pensions and Welfare Benefit Programs, 29 C.F.R. Part 2550, Rules and Regulations for Fiduciary Responsibility; Investment of Plan Assets Under the “Prudence Rule,” Department of Labor, Final regulation.

[85] Proposing Release at FR 16106

[86] Ibid.