Responding to a 2025 executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors,” the U.S. Department of Labor in March 2026 released a proposed regulation addressing fiduciary oversight of retirement plan investments that include alternative assets. The proposal is significant not only because it provides guidance on the prudent evaluation of those investments, but also because it would create a process-based safe harbor designed to help fiduciaries satisfy their obligations under the Employee Retirement Income Security Act of 1974 (ERISA).
In prior guidance on alternative investments — such as private equity, private credit, real estate and hedge funds — in retirement plans, the Department of Labor emphasized that those investments differ from traditional plan options in important respects, including valuation, liquidity, fees and complexity. Those differences have historically contributed to employer reluctance to include alternative assets in retirement plans because of the added diligence required and the potential for fiduciary liability.
The proposal clarifies that alternative assets are not prohibited under ERISA if fiduciaries follow a prudent evaluation process.
It applies to the selection of investment alternatives in participant-directed individual account plans, including asset allocation funds, mutual funds, collective investment trusts and target date funds that include alternative assets.
The Department also emphasizes that diversification, liquidity, valuation transparency and participant impact remain central considerations, suggesting that many plans may continue to limit alternative assets to professionally managed, diversified vehicles.
Section 404(a) of ERISA requires employers, investment committees and other fiduciaries to act solely in the interests of plan participants and beneficiaries. Fiduciaries must act with the care, skill, prudence and diligence under the circumstances that a prudent person acting as a fiduciary and familiar with retirement plan matters would use to manage a retirement plan.
As a result, fiduciaries must make a careful inquiry into the merits of any investment offered. If they do not have sufficient knowledge to evaluate investments, they must obtain appropriate expert advice.
ERISA also provides that fiduciaries may be liable to restore losses to a retirement plan resulting from a breach of their duties. Even if oversight of plan investments has been properly delegated to a financial professional, the delegation does not fully eliminate fiduciary responsibility especially as to prudent appointment and monitoring.
Proper fiduciary oversight remains critical, particularly given the more than 600 class action lawsuits filed over the past decade against employers and individual fiduciaries challenging allegedly imprudent investment options and excessive fees in 401(k) and other retirement plans.
The Department acknowledges that uncertainty and fear of lawsuits have discouraged fiduciaries from offering certain investment options. Thus, a major purpose of the proposed rule is to reduce fiduciary litigation risk, particularly claims alleging imprudent investment selection or excessive fees.
The proposal establishes a process-based safe harbor that is intended to provide a framework for demonstrating satisfaction of the duty of prudence. The regulation establishes a non-exhaustive list of six factors for a fiduciary to objectively, thoroughly and analytically consider and make determinations about when selecting investment alternatives. The six factors are (1) performance and risk characteristics, (2) fees and total expenses, (3) liquidity and participant access, (4) valuation methodology, (5) availability of appropriate benchmarks and (6) complexity and participant understanding. As is the case now, in most cases, fiduciaries will need to rely on investment consultants to provide the underlying data and analysis necessary to meet the safe harbor.
The Department states that each factor’s applicability to a specific investment alternative varies based on the particular facts and circumstances involved. However, the Department believes that each of the six factors is integral to the vast majority of investment alternatives. The proposed rule provides examples of how each factor applies to different fact patterns involving different types of investments. If a fiduciary reasonably analyzes and documents these factors, that process should strengthen the fiduciary’s ability to defend the investment decision against hindsight-based litigation challenges, even if the investment later underperforms. In any such circumstances, the ultimate determination of fiduciary compliance rests with the federal courts.
Once finalized, the regulation could meaningfully influence retirement plan investment menu design, fiduciary documentation practices and the role of alternative investments. The proposal also comes at a time when the retirement plan industry expects greater use of alternative assets in defined contribution plans.
Careful documentation of the decision-making process, including analysis of the six identified factors, will be essential to demonstrate compliance.
John E. Rich, Jr. chairs the Tax Department at McLane Middleton. He can be reached at john.rich@mclane.com or 603-628-1438.
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