Beyond a Checklist: Understanding a Prudent Fiduciary Process Under the Department of Labor (DOL)’s Six Proposed “Safe Harbour” Factors

The Employee Retirement Income Security Act of 1974 (ERISA) governs employer-sponsored 401(k) plans and the fiduciaries tasked with administering and overseeing those plans. In the 50 years since ERISA’s enactment, the landscape has shifted from one primarily characterised by defined benefit pension plans to one dominated by defined contribution 401(k) plans.

401(k) plan fiduciaries are charged with overseeing and monitoring the investment options and service providers made available to plan participants. Often referred to as the “highest duties known to law”, ERISA holds plan fiduciaries to the utmost standards of prudence and loyalty. On prudence, ERISA Section 404(a)(1)(B) states that fiduciaries must discharge 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”. ERISA does not, however, articulate what, precisely, plan fiduciaries must do to satisfy this “prudent expert” standard. However, for over 30 years the DOL has maintained that fiduciaries should evaluate whether the investment would be expected to provide a plan with a lower rate of return than available alternative investments with commensurate degrees of risk or riskier than alternative available investments with commensurate rates of return. If so, the investment will not be prudent. See Department of Labor Interpretive Bulletin 94-1 (23 June 1994).

The DOL’s recently proposed “safe harbour” regulation addressing ERISA’s fiduciary duties in selecting investment alternatives represents a significant development in defined contribution plan governance. The proposal seeks to establish a process-based safe harbour for fiduciaries selecting investments for participant-directed plans, including investments containing alternative assets such as private equity, private credit, real estate, infrastructure, commodities and potentially cryptocurrency.

Unlike mutual funds, these types of alternative investments are not subject to the same registration requirement or the regulatory regime of the federal securities laws. Because of that, these investments historically have been available only to sophisticated investors who can properly assess and understand the risks and have sufficient assets to bear the risk of financial loss.

The DOL’s proposal could dramatically alter this long-time dynamic, marking the first time these alternative investments could be offered entirely to a market of investors. Instead of limiting sophisticated and risky investments only to sophisticated investors able to bear the risk, plan fiduciaries could make these alternative investments available to every participant in the 401(k) plan. The amount of money at stake is staggering, and, if passed, plan fiduciaries should expect an onslaught of pressure from those who stand to benefit financially. 

At first glance, the proposal appears to offer fiduciaries a more navigable roadmap for satisfying ERISA’s prudence obligations. The DOL identifies six non-exclusive factors that fiduciaries must evaluate in order to obtain a presumption of prudence under ERISA Section 404(a)(1)(B). However, fiduciaries should resist the temptation to view the proposal as a simplified compliance exercise or litigation shield that can be achieved through a superficial checklist approach.

In practice, the proposed framework sets the floor for fiduciary process. Each factor requires nuanced judgement, detailed market analysis and ongoing monitoring that many committees may underestimate. It effectively acknowledges what ERISA litigators and courts have emphasised for decades: prudence is not simply checking boxes off a list – rather, it is the product of a rigorous, well-informed and diligent fiduciary process.

The DOL’s proposal does not lower fiduciary risk. Instead, it formalises expectations for a robust governance framework around investment selection and monitoring.

The Changing Retirement Plan Market Landscape

The proposed regulation arrives at a time when the retirement marketplace is facing the potential for significant change in retirement plan investments. As private market sponsors continue searching for access to defined contribution capital, there has been a rise in managed accounts, private equity, annuities and so-called “personalised” retirement solutions being pitched as alternative investment options for plan participants.

The DOL’s proposal should not be read as a signal that fiduciaries should embrace such alternatives casually. Indeed, many fiduciary committees already struggle to maintain consistent monitoring procedures for traditional fund line-ups on a plan. Sometimes, these committees attach too much importance to blindly going through the motions, repeatedly checking the same boxes. Many are under the illusion that being wedded to habit, rather than devotion to a prudent fiduciary process, satisfies their duty. However, under the DOL’s proposal, many fiduciaries evaluating more complex strategies will need enhanced governance structures, deeper investment expertise, outside consultants, revised investment policy statements, more sophisticated monitoring metrics, and substantially expanded documentation practices.

The DOL’s proposal repeatedly emphasises analytical rigour, comparison against similar alternatives, independent valuation methodologies, liquidity risk assessment and meaningful benchmark construction. Analysing each proposed factor individually, and certainly taken together as a whole, the burden associated with satisfying the proposed safe harbour is considerably greater than some may appreciate.

Assessing Performance

“The fiduciary must appropriately consider a reasonable number of similar investment alternatives and 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 maximise risk-adjusted return on investment, net of those fees and expenses.”

The first factor requires fiduciaries to decide how much risk and volatility they want to expose their employees to. The lower the risk, the lower potential for return; the higher the risk, the higher potential for return. Therefore, fiduciaries should evaluate an investment’s risk-adjusted performance net of fees as compared to a reasonable number of similar investment alternatives. This emphasises the critical role that performance plays when evaluating plan investment options. The purpose of a 401(k) plan, after all, should be to grow investments into a retirement nest egg for employees while sparing them the stress of extreme up-and-down volatility.

The key here will be diligent fiduciary rigour in evaluating a number of undefined metrics. While the specific metrics will vary from plan-to-plan and investment-to-investment, a few in particular stand out.

• First, creating objective metrics through which fiduciaries can determine which investment alternatives are “similar” to the one under consideration.
• Second, determining which method of calculating risk-adjusted returns applies best to the given investment type.
• Third, determining the appropriate time horizons by which the fiduciaries will evaluate performance. The DOL currently requires plan fiduciaries to disclose investment returns for one-, five- and ten-year periods in annual participant disclosures. See 29 CFR Section 2550-404a-5(d)(1)(ii)(A). Presumably, this would be a minimum expectation for the time horizons by which fiduciaries evaluate historic performance, though it may make sense to include additional performance periods depending on the investment type. 

Within each of these three illustrative examples there are myriad considerations that fiduciaries must consider. Fiduciaries therefore must establish and document their process and the rationale for why a selected investment’s expected risk-adjusted return profile is superior relative to available alternatives.

Furthermore, the values of certain asset classes, such as commodities, options and cryptocurrencies, can change in the blink of an eye, and wipe out an entire portfolio without warning. Unless plan fiduciaries build adequate guardrails to deal with extreme volatility, participants exposed to that risk could find themselves on the wrong end of market swings.

This obligation will likely require many fiduciary committees to engage deeply with conflict-free investment professionals with specialised expertise when evaluating non-traditional products. Ultimately, though, the DOL makes clear that fiduciaries cannot disregard red flags in performance simply because a strategy is marketed as innovative or diversified.

Fee Analysis

“The fiduciary must 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, and any other value the alternative brings to furthering the purposes of the plan. For this purpose, ‘value’ includes any benefits, features, or services other than risk-adjusted returns net of fees.”

The DOL’s proposed safe harbour reiterates that fiduciaries must consider the fees and expenses of investments in the plan line-up. While not obligated to select the cheapest available investment, fiduciaries must be able to articulate and justify what additional “value proposition” the higher-cost investment alternative provides. 

For example, if an actively managed strategy charges more than a passive alternative, the committee must evaluate what extra benefits warrant the extra costs. This may require investigating issues such as:

• whether historical alpha generation is sustainable;
• whether diversification characteristics improve participant outcomes;
• whether the manager’s process has remained consistent; and
• whether historic performance is actual or the result of hypothetical modelling.

Similarly, the proposal’s discussion of share classes underscores that fiduciaries cannot get so in the weeds that they overlook common sense. The DOL is clear that selecting a more expensive share class when an identical lower-cost option exists “demonstrates imprudence”.

Most alternative investment products charge two types of fees: an investment advisory fee as a percentage of a fund’s net assets and a performance fee based on a percentage of the fund’s profits. This structure is typically referred to as “2 and 20”, a 2% investment advisory fee and a 20% performance fee. Historically, performance fees could only be assessed against investors with substantial assets. Most participants would not qualify.

Fiduciaries will need to embrace a new set of issues that performance fees pose. Will participants understand how performance fees work? How are they calculated? Is the fee based on all gains or just gains above a threshold/benchmark? Is there a high watermark – ie, must the fund recoup past losses before it can begin calculating performance fees? Participants may not understand these concepts or how they work. Disclosure that the average person can understand will be critical to addressing these issues.

The proposal ultimately increases, not decreases, expectations regarding the process that fiduciaries use to evaluate fees and the rationale used to justify any additional expenses. Fiduciaries who cannot clearly explain the basis for an investment’s total economic cost structure should not feel “safe” within the proposed “safe harbour” framework.

Liquidity Analysis

“The fiduciary must appropriately consider and determine that the designated investment alternative will have sufficient liquidity to meet the plan’s anticipated needs at both the plan and individual levels.”

Liquidity may emerge as one of the most operationally challenging aspects of the proposed rule. Many alternative investment funds own non-public investments that cannot be readily disposed of like a stock traded on an exchange. Such funds hold an abundance of cash on hand, and therefore lack the liquidity that many plan participants have come to expect with publicly traded mutual funds.

A participant’s access to their retirement savings may be limited by the fund’s redemption policies. Redemption policies for these funds may permit monthly, quarterly or annual redemptions. Others may allow redemptions only when the fund’s manager, in their sole discretion, allows it. Often, alternative investment funds may honour redemptions not with cash but with the securities in the portfolio which, themselves, may be illiquid. Under this backdrop, fiduciaries must give consideration to the liquidity needs of participants who experience a financial crisis, retire or change employment, and to beneficiaries of a participant who passes away.

It remains unclear whether illiquid investment alternatives will be asked to prepare liquidity risk management programmes that mirror those of registered funds, or whether fiduciaries will instead draw on bargaining power to negotiate certain key provisions from Rule 22e-4 of the Investment Company Act of 1940, such as limiting investment in illiquid assets to 15% or less, or to enter into separate agreements with a fund’s manager (also known as side letters) that allow plan participants special redemption rights.

This requirement creates a substantial practical challenge for many committees. Liquidity risk management involves highly technical concepts that many fiduciaries lack the expertise to evaluate. As a result, one anticipated outcome of the proposal is greater fiduciary reliance on outside investment professionals with specialised expertise. Even then, fiduciaries retain oversight obligations and must document both the process and rationale for their conclusion.

Valuation Risk Creates Significant Exposure

“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.”

Defined contribution plan fiduciaries should expect regular account valuation, daily transactions and transparent, conflict-free pricing. Because real estate funds, hedge funds and private equity funds hold hard-to-price assets, plan fiduciaries will need to familiarise themselves with and periodically monitor a fund’s valuation process to ensure a timely and fair valuation of the portfolio.

The DOL’s proposal reflects growing regulatory concern regarding conflicts in private market valuation practices. Fiduciaries, then, must engage in rigorous scrutiny to ensure an independent, conflict-free valuation process. How does a plan assign a fair value to an asset that is not traded on a recognised exchange or whose trading has been suspended? How does a plan assign a fair value to a bond that is in default? What steps are the plan’s fiduciaries taking to ensure that the private fund manager has adequate procedures in place that fairly value the assets in the fund? Fiduciaries must be able to answer these, and more, questions regarding the valuation of plan investments.

Failure to do so evidences an imprudent fiduciary process. For example, under the DOL’s proposal, funds managed by an entity that can purchase private assets from an affiliate using proprietary valuation methods would not meet the requirements of the proposed “safe harbour”. A fiduciary committee that cannot explain how illiquid assets are valued may struggle to defend the prudence of selecting those investments.

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. The proposal defines ‘meaningful benchmark’ for this purpose as ‘an investment, strategy, index, or other comparator that has similar mandates, strategies, objectives, and risks to the designated investment alternative.’”

The investment adviser of an investment fund charges an investment advisory fee on the premise that it will beat an identified benchmark (eg, S&P 500, FTSE Narieit, LIBOR). If a plan intends to pay these fees, fiduciaries should select and retain an asset that beats its benchmark; otherwise, the plan is not getting value for its money. Prudent selection and evaluation of investment benchmarks are critical to evaluating fund performance. Poorly chosen benchmarks can obscure underperformance or exaggerate success.

The DOL’s proposal comes just as the Supreme Court gears up to weigh in on the much-debated “meaningful benchmark” standard in Anderson v Intel Corp Investment Policy Committee.

In Anderson, the Ninth Circuit held that to plead fiduciary imprudence “based on a fiduciary's decision to make one investment rather than an alternative” plaintiffs must provide a “sound basis for comparison” – ie, a “meaningful benchmark”. See Anderson, 137 F4th 1015, 1022 (9th Cir 2025), cert granted, 223 L Ed 2d 553 (16 January 2026). The Ninth Circuit went on to explain that meaningful benchmarks are those that have similar aims, risks and potential rewards. Id 1023. This is consistent with DOL guidance that requires fiduciaries to “tak[e] into consideration the risk of loss and the opportunity for gain... compared to the opportunity for gain... associated with reasonably available alternatives with similar risks”. See 29 CFR Section 2550.404a-1(b)(2)(i).

The Supreme Court will now take up the case to determine whether pleading a “meaningful benchmark” is required in fiduciary prudence claims. See Anderson, Petition for Writ of Cert, Anderson, 2025 WL 2993964, at *i (US 20 October 2025) (No 25-498).

Regardless of the outcome in Anderson, one thing is clear. Plan fiduciaries can no longer treat benchmarking as a routine reporting exercise. Benchmarking must be treated with the same rigour and scrutiny as any other central component of fiduciary prudence analysis. Accordingly, fiduciaries should expect to thoroughly evaluate benchmarks and document their rationale for selecting appropriate investment benchmarks.

Complexity

“The fiduciary must appropriately consider the designated investment alternative’s complexity and determine that she has the skills, knowledge, experience, and capacity to comprehend the designated investment alternative sufficiently to discharge her obligations under ERISA and the governing plan documents or whether she must seek assistance from a qualified investment advice fiduciary, investment manager, or other individual in evaluating the designated investment alternative.”

The final factor – complexity – arguably underlies every part of a prudent fiduciary process. Many alternative investment products pursue highly complex investment programmes. Terms such as “long/short”, “market neutral”, “risk arbitrage” and “leveraged portfolio” become part of the lexicon.

Fiduciaries are expected to evaluate plan investments with the same skill and expertise that industry professionals “familiar with such matters” would use when overseeing “an enterprise of a like character and with like aims”. See 29 USC Section 1104(a)(1)(B). For many retirement plans, this means the skill and expertise expected of an investment professional tasked with overseeing several billion dollars in assets under management.

With alternative investments pushing to gain access to retirement plan dollars, scrutiny of fiduciary knowledge and expertise becomes even more critical. The DOL aptly recognises that some investments may exceed the practical competence of typical plan fiduciaries, especially where fiduciary committees are comprised of internal employees whose primary responsibilities are unrelated to sophisticated investment analysis.

The proposal’s managed account example is particularly instructive. The DOL concludes that fiduciaries act imprudently when they fail to understand how a complex service operates and therefore cannot provide the information necessary for participants to receive its intended benefits.

However, the foregoing principle extends well beyond managed accounts. Plan fiduciaries cannot rely on superficial familiarity with investment terminology. Under the DOL’s proposal, fiduciaries must understand the mechanics of analysing:

• investment objectives and how the manager intends to pursue them;
• whether the fund concentrates its investments in a particular asset;
• how much leverage the fund intends to use;
• how volatility can affect performance;
• the level of risk associated with the product and the maximum risk of loss; and
• other considerations, including risk-adjusted investment performance, fee structures that may include performance fees, liquidity constraints, valuation methodologies and benchmark construction.

Introducing complex alternative investments such as cryptocurrency exposure, multi-layered option and futures strategies, or private equity structures pushes most plan fiduciaries far beyond the limits of their expertise. Accordingly, plan fiduciaries should think carefully about whether they have the ability to prudently manage a plan including such investments in the line-up.

The Impact of the DOL Proposal in a Post-Chevron Deference Era

The ultimate impact of the DOL’s proposal, if adopted, remains unclear. The proposal arrives during a period of major administrative law uncertainty following the Supreme Court’s decision in Loper Bright Enterprises v Raimondo, 603 US 369, 412 (2024).

Historically, courts often afforded considerable deference to agency interpretations, such as the DOL’s interpretations of ERISA fiduciary obligations. In Loper Bright, however, the Supreme Court overruled the long-standing Chevron doctrine of deference to agency interpretations. Id at 412. This decision significantly alters the regulatory landscape for federal agencies, including the DOL.

Here, the reduction in agency deference makes it difficult to predict the ultimate impact of the DOL’s proposal. Different courts may reach different conclusions regarding how, or whether, to utilise the DOL’s proposed “safe harbour” framework when evaluating fiduciary conduct. Moreover, administrations change, and a future administration may de-emphasise the DOL’s proposal, materially amend it or scrap it all together.

Conclusion

The DOL’s proposed fiduciary safe harbour marks a significant development in ERISA fiduciary governance. While the proposal provides a structured framework for evaluating plan investment options, it does not create a one-size-fits-all fiduciary “checklist”. On the contrary, the DOL’s proposal emphasises that fiduciary prudence requires diligent, thorough, rigorous and ongoing investment analysis across multiple dimensions.

Defined contribution plans are increasingly becoming the central retirement savings vehicle for American workers. Simultaneously, investment products are becoming more complex and more difficult for typical plan participants to evaluate on their own. This makes fiduciary prudence in the selection and ongoing monitoring of plan investment options more important than ever.

Against this backdrop, ERISA fiduciaries should approach the DOL’s proposed framework as one that clarifies the need for sophisticated oversight of increasingly sophisticated investment options. Otherwise, plan fiduciaries may find themselves well outside the safety of the proposed “safe harbour”.