Beyond “Alternatives”: A Brief Regarding the Proposed Investment Selection Safe Harbor Rule (3/30/2026)
April 1, 2026
Note that we aren’t lawyers. Vergence Partners doesn’t provide legal advice. The following is based on a layperson’s interpretation of the rule proposed by the Department of Labor.
SUMMARY
Following the release of the executive order “Democratizing Access to Alternative Assets for 401(k) Investors” in August of 2025, expectations have been high for a final rule addressing the use of alternative investments in defined contribution (DC) plans. On March 30th, the Department of Labor DOL released a proposed rule, titled “Fiduciary Duties in Selecting Designated Investment Alternatives”, which addresses the selection of designated investment alternatives (DIAs) by the fiduciaries of participant-directed plans governed by the Employee Retirement Income Security Act (ERISA).
The proposed rule, if made final, would:
Address the selection of traditional investments as well as alternatives, such as private equity and private credit, and investments that include exposure to them.
Affirm that ERISA is a process-driven, rather than outcome-driven, regime.
Affirm that fiduciaries have maximum discretion and flexibility in selecting designated investment alternatives.
Provide a safe harbor (“presumption of prudence”) for investment selection where fiduciaries follow a defined analytical framework in the selection of DIAs – traditional and alternative.
The proposed rule doesn’t alter ERISA fiduciary standards, but it does add greater specificity to expectations.
The proposal is now subject to a 60-day public comment period, only after which it, or a modified version, will become effective.
INTRODUCTION
Alternative investments, such as private equity, private credit, and hedge strategies, have long been accessible to DC plans (there is no specific regulation that would prevent their use). However, product complexity and operational and litigation concerns have challenged widespread adoption.
Over the last two decades, alternative product providers have made several pushes to crack the DC plan market open to alternative investments. Many DC plan fiduciaries have voiced the need for a framework that would allow those investments to be included in plans without increasing the risk of litigation. Alternatives, especially private equity and digital assets, have been the subject of a decade of political back-and-forth, with successive executive administrations either encouraging or discouraging sponsors from considering their inclusion in DC plans as a matter of policy rather than regulation.
In August of 2025, the Trump administration issued an executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors,” which directed the Department of Labor (DOL) and Securities Exchange Commission (SEC) to review any policies that served as roadblocks to the inclusion of alternatives in DC plans. It ordered the DOL to reexamine its “guidance on a fiduciary’s duties regarding alternative asset investments in ERISA-governed 401(k) and other defined-contribution plans” and “clarify its position on alternative assets and the appropriate fiduciary process associated with offering asset allocation funds containing investments in alternative assets.”
In response, the DOL released “Fiduciary Duties in Selecting Designated Investment Alternatives” on March 30, 2026. The proposed rule addresses the selection of designated investment alternatives (DIAs) by the fiduciaries of participant-directed plans governed by the Employee Retirement Income Security Act (ERISA). While the proposal was motivated by a desire to encourage the inclusion of alternative assets in DC plans, the proposed rule takes a broader approach by guiding retirement plan fiduciaries regarding investment selection and oversight generally. The proposal itself does not endorse or prohibit any asset class, including alternatives.
The proposed rule would establish a formal, process-based safe harbor under ERISA’s duty of prudence for selecting DIAs, explicitly including those with alternative asset exposure.
The rule appears intended to:
Reduce litigation risk that has constrained fiduciary decision-making.
Reinforce ERISA as a process-driven fiduciary regime.
Provide fiduciaries who follow a defined analytical framework a presumption of prudence for selection decisions.
The proposed rule now enters a 60-day comment period, after which it will be modified or published. Only after publication will a final rule become effective.
CORE CONCEPTS OF THE PROPOSED RULE
Selection of DIAs Is a Fiduciary Act. The rule explicitly confirms:
Selecting each investment option is a fiduciary function subject to ERISA §404(a)
Prudence applies to each individual option, and to the menu as a whole.
ERISA prudence is a process standard (vs. an outcome standard). The regulation would codify that:
Prudence in selection of DIAs is evidenced by the fiduciary’s process at the time of decision, rather than investment outcomes.
Fiduciaries must give “appropriate consideration” to relevant facts and circumstances.
Fiduciaries who follow a reasoned, documented process to select DIAs would be “entitled to significant deference” from courts.
This is particularly important for alternatives, where outcomes may be less certain and dispersion higher.
Fiduciaries have maximum discretion in selecting DIAs. ERISA “does not require or restrict any specific type” of investment. This implies that:
There is no per se prohibition on investments such as private equity, private credit, real assets, or digital assets
Alternative investments, or investments that allocate to alternative investments, are treated identically to traditional assets under a neutral fiduciary standard.
THE SAFE HARBOR FRAMEWORK AND ALTERNATIVES CONTEXT
A Safe Harbor Framework for Investment Selection. The proposed regulation introduces a process-based safe harbor for plan fiduciaries to use when selecting DIAs, including traditional and alternative investments. The rule deliberately excludes a safe harbor for monitoring investments. Under the proposal’s present form, the practice of monitoring would incur traditional fiduciary exposure, and fiduciaries would retain a continuous duty to monitor all DIAs and remove imprudent options.
The proposal references six factors that a plan fiduciary must objectively, thoroughly, and analytically consider when selecting designated investment alternatives for the plan menu under a safe harbor process. Fiduciaries who reach reasoned determinations through the safe harbor process would be entitled to a presumption of prudence.
This presumption of prudence is a key innovation of the proposed rule. In the case of a lawsuit, it would merit significant judicial deference towards fiduciaries who followed the safe harbor guidelines, placing the burden on plaintiffs to prove imprudence. This would shift trial dynamics away from outcome-based claims made in hindsight to the scrutiny of process and contemporaneous documentation.
The Six Required Factors. The proposed safe harbor centers on six factors:
Performance (risk-adjusted, net of fees). “…the fiduciary must appropriately consider a reasonable number of similar investment alternatives and then must determine that the risk-adjusted expected returns of the designated investment alternative, over an appropriate time horizon and net of anticipated fees and expenses, furthers the purposes of the plan by enabling participants and beneficiaries to maximize risk-adjusted return on investment, net of those fees and expenses.”
Fees and expenses. “…the fiduciary must objectively, thoroughly, and analytically consider a reasonable number of similar alternatives and determine that the fees and expenses of the designated investment alternative are appropriate, taking into account its risk-adjusted expected returns, net of fees and expenses, and any other value the designated investment alternative brings to furthering the purposes of the plan.”
Liquidity. “…the regulation also provides that plans do not need to offer fully liquid investment options. Nonetheless, plan fiduciaries must ensure that investments can deliver on any promises of liquidity that are made to participants and beneficiaries. Plan fiduciaries should also consider the liquidity needs of their plan and whether other plans’ (or other investors’) redemptions might adversely affect the liquidity of the designated investment alternative.”
Valuation. “…the fiduciary must appropriately consider and determine that the designated investment alternative has adopted adequate measures to ensure that the designated investment alternative is capable of being timely and accurately valued in accordance with the needs of the plan.”
Performance Benchmarking. “…the fiduciary must appropriately consider and determine that each designated investment alternative has a meaningful benchmark and compare the risk-adjusted expected returns, net of fees, of the designated investment alternative to the meaningful benchmark. This provision reflects the great weight of authority.”
Complexity. “…the fiduciary must appropriately consider the complexity of the designated investment alternative and determine that it has the skills, knowledge, experience, and capacity to comprehend it sufficiently to discharge its obligations under ERISA and the governing plan documents or whether it must seek assistance from a qualified investment advice fiduciary, investment manager, or other individual.”
The 1979 Investment Duties Regulation prescribed that fiduciaries need to give “appropriate consideration to those facts and circumstances that… are relevant to the particular investment” and to “act accordingly.” These factors would collectively operationalize what it means to “act accordingly” under the 1979 rule.
Note that the proposal describes this list as “non-exhaustive,” which we read (as laypeople) to mean that fiduciaries would still be expected to weigh all other material facts (such as investment strategy, management quality and tenure, or style consistency).
The Context of Alternatives. Though the proposed rule has broad application, it implicitly recognizes that alternatives require enhanced diligence, including:
Liquidity. E.g., evaluation of multi-year lockups vs. participant daily liquidity.
Valuation. E.g., evaluation of model-based or periodic NAV vs. market pricing.
Fees. E.g., evaluation of layered, performance-based structures vs. traditional fund expense ratios.
Complexity. E.g., the need for internal fiduciary expertise or qualified external advisors.
The proposal explicitly recognizes that alternatives may improve diversification and risk-adjusted returns. It also provides examples of circumstances where fiduciaries might prudently select managed funds (such as target date funds) that include an allocation to alternative investments.
KEY TAKEAWAYS FOR PLAN SPONSORS AND FIDUCIARIES
ERISA fiduciary standards are unchanged. The proposal fills in detail regarding expectations for the process and documentation of ERISA plan investment selection.
The proposed rule is a litigation framework as much as an investment selection framework. The primary practical effect is that it would establish a defensible fiduciary process and record-keeping standard and encourage formalized, documented due diligence. The proposed rule contains twenty often highly specific hypothetical examples of fiduciary investment evaluations that appear to be drawn directly from existing case law.
Alternatives are structurally permissible; process is the gatekeeper. Fiduciaries have always, in theory, been able to include alternatives in DC plans. The new proposal would entitle fiduciaries to a presumption of prudence, provided they evaluate alternatives using the same safe harbor framework as other assets and address their unique characteristics (liquidity, valuation, fees).
Complexity requires capability. Fiduciaries must assess whether they have sufficient expertise to understand, analyze, and select more complicated investments. If not, they must seek out (and be comfortable relying upon) qualified advisors. Qualified is a key phrase: regardless of an investment selection safe harbor, fiduciaries remain responsible for selecting and monitoring their advisors, which implies that the fiduciary must have adequate knowledge of the subject material to adequately assess their advisor's ability to do the job.
Target date funds and other asset allocation vehicles are seen as the primary implementation channel. The proposal repeatedly distinguishes between managed funds and standalone options. While not mandated, the rule strongly implies that alternatives are most appropriate when embedded in target-date funds, managed accounts, and diversified asset allocation vehicles. Such packaging may mitigate concerns about investment complexity at the participant level and liquidity mismatch risks.
Documentation is crucial as the core fiduciary defense. The concept of "if it isn't documented, it didn't happen" is nothing new to good fiduciaries. A compliant process should evidence:
Consideration of the specified factors (as well as any other material facts and circumstances).
Comparative analysis vs. other potential investment options.
Explicit reasoning regarding traditional vs. alternative tradeoffs.
Alignment with participant outcomes.
Monitoring would remain a critical exposure area. Since the proposed rule doesn’t include a safe harbor for DIA monitoring, ongoing diligence should mirror selection rigor, and fiduciaries must:
Periodically reassess their assumptions.
Evaluate evolving risks.
Act on adverse developments.
OUR Perspective
The proposed rule represents a material shift in fiduciary risk management. If made final, it would:
Institutionalize a safe harbor process for selecting investment options (alternative and otherwise).
Lower implicit barriers to alternative investments.
More sharply focus ERISA litigation on process quality and documentation.
Regarding alternatives: For highly sophisticated DC fiduciaries, the rule could encourage institutional portfolio construction including private markets, but only where governance frameworks are disciplined, well-documented, and rigorous. Fiduciaries, however, must carefully and honestly assess their ability to understand the investments in their available universe and to adequately monitor not only their investment managers but also their advisors. At this point, most fiduciaries (and advisors) are likely better equipped to limit themselves to selecting traditional investments.
Regarding litigation: We’ll have to wait and see. Regardless of the specifics of the final format, the Supreme Court’s abandonment of the Chevron doctrine (which effectively required courts to defer to federal agencies' reasonable interpretations of ambiguous statutes they administer – remember, the proposal is a regulation, not a law like ERISA), we don’t have certainty that judges would have to apply the DOL’s regulatory standards to ERISA-based court cases. In addition, the inclusion evaluation examples in the rule could, on the one hand, provide helpful guidance for plan fiduciaries and advisors. On the other hand, those very thorough and specific examples might be a resource for a plaintiff.
All in all, we see the proposed rule as an attempt to provide clarity that could prove helpful to fiduciaries. At the same time, meeting the explicit and implicit requirements for the safe harbor selection of any investment could be a very high bar for many sponsors.
On to a final rule!
Contact Jay Young (jay.young@vergencepartners.com) or me (tom.douglas@vergencepartners.com) with any comments or questions. Visit www.vergencepartners.com and follow us on LinkedIn to see what else we’re thinking about.
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