Proposed Rule Seeks to Clarify Fiduciary Duties in Investment Plan Decisions Subject to ERISA, but Risks Remain

The Department of Labor (DOL) recently released proposed regulations regarding the investment of assets of an employee benefit plan governed by the Employee Retirement Income Security Act (ERISA) and the plan fiduciary’s duties under ERISA in connection with selecting designated investment alternatives for a participant-directed individual account plan (including asset allocation funds that include so-called alternative assets). This is in response to a recent executive order intended to have the effect of “Democratizing Access to Alternative Assets for 401(k) Investors.” The executive order defined such investments as:

• 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;
• Direct and indirect interests in real estate, including debt instruments secured by direct or indirect interests in real estate;
• Holdings in actively managed investment vehicles that are investing in digital assets;
• Direct and indirect investments in commodities;
• Direct and indirect interests in projects financing infrastructure development; and
• Lifetime income investment strategies including longevity risk-sharing pools.

While the proposed regulations purport to alleviate the concerns that ERISA plan fiduciaries have with respect to litigation risks, the regulations also go to great lengths to note that the proposed regulations do not really eliminate the general fiduciary responsibilities to exercise prudence in their choice of investment alternatives, and the suitability of the investment alternatives for the participants in the plan, nor do the proposed regulations eliminate the need to monitor such investment alternatives over time for continued suitability. 

These general fiduciary duties may be implicated as a result of the selection of alternative assets as investment options for participants for a variety of reasons. These may include the understanding of the risks that are inherent in any investment and the potential that participants may not adequately appreciate those risks. Alternative assets may also have liquidity risks, making particular investments inappropriate in light of the plan’s liquidity needs.

The proposed regulations create what are referred to as “safe harbor” conditions and suggest that plan fiduciaries be given significant deference in the event of a dispute. While this may sound reassuring, if the DOL itself is no longer given deference to its determinations regarding ambiguous law after the U.S. Supreme Court’s 2024 ruling that eliminated the Chevron doctrine, this proposed regulation seems to assume that a court would then defer to an ERISA plan fiduciary’s determinations, which view may not carry that much weight. There is also the possibility that the fiduciary of an ERISA plan may attempt to follow the safe harbor but may not comply with all of the requirements of that safe harbor. There is also the ongoing possibility that even where the initial determination to establish a plan investment option consisting of alternative assets (or any other type of investment, for that matter) was prudent and satisfied the safe harbor at that time, the fiduciary may not have monitored the investment option sufficiently in light of future developments, volatility of the investment, liquidity concerns, etc., so that an investment alternative that may have been fine from a fiduciary perspective at the outset ceases to be an acceptable investment at a later date. 

Interestingly, the discussion of the fiduciary duties of an ERISA plan fiduciary as set out in the proposed regulations are stated broadly and, while directed primarily at creating a path for using appropriate care and diligence with respect to various new types of investment assets (which seem to be the primary focus of the proposed regulations), the discussion also highlights an obligation to examine other aspects of any type of investment using plan assets (that may well be at odds with the underlying intent of the current administration). 

While the general statement of the requirement of prudence on the part of an ERISA plan fiduciary states that there is an obligation of the fiduciary to consider all relevant factors, and that this applies to the valuation of alternative assets as a plan investment option available to participants, this same fiduciary obligation can equally be read to require, with respect to more traditional types of plan investment options, that there be an evaluation of such matters as the impact on an investment of environmental factors, benefits of a diverse workforce and other governance and societal implications of the businesses included in the investment choices available to plan participants. 

While the regulation has a stated purpose of mitigating litigation risks for fiduciaries of ERISA plans, there is no particular reason to expect that the inclusion of “alternative assets” in the choices available to participants will not be subject to the same scrutiny and litigation that has grown in significance over time, and will likely continue without the proposed regulation having any significant impact if it is finalized. 

Employers that sponsor ERISA plans for which these rules are relevant (most commonly, 401(k) and 403(b) plans) should be aware of the continuing risks associated with the operations of such plans and of the choices made with respect to the investment of plan assets. Plan fiduciaries are advised to consult ERISA counsel on these regulatory developments and litigation trends, as well as the complexities of satisfying the ERISA fiduciary obligations, both as an initial and as an on-going process with respect to plan investments. 

Comments on the proposed regulations must be submitted by June 1, 2026.