Department of Labor Proposes New Regulatory Safe Harbor for Prudent Selection of Designated Investment Alternatives in Participant-Directed Individual Account Plans

The Proposal and Safe Harbor

On March 30, 2026, the U.S. Department of Labor (DOL) proposed detailed guidance on the prudential selection of designated investment alternatives (DIAs) for participant-directed individual account plans. Central to the proposal is a process-based safe harbor to help protect plan fiduciaries from liability in connection with their DIA selections. Although precipitated by the president’s executive order to facilitate alternative investments in such plans and relieve litigation risk associated with asset diversification, the safe harbor extends beyond alternative investments and covers any DIA, regardless of class or type. If finalized, the proposal would be codified at DOL Regulation section 2550.404a-6.

The DOL’s separate “investment duties” regulation, DOL Regulation section 2550.404a-1, requires a fiduciary making an investment decision to “give appropriate consideration to all facts and circumstances that the fiduciary knows or should know are relevant” to the investment and “act accordingly.” The proposal, if finalized, would supplement this regulation and its explanation of prudence with respect to DIAs but otherwise leave it in place.

The proposal’s safe harbor seeks to establish a legal presumption that fiduciaries meeting certain conditions have acted prudently in their DIA selections. This presumption, if upheld by the courts, should lower the risk profile of compliant selections, including defense, settlement, and insurance costs. Lower risks and costs may encourage fiduciaries to incorporate alternatives and other less traditional investments into their DIAs, either as standalone options or, we think more likely, as components of professionally managed target-date or other pooled fund options.

Under the proposal, ERISA (Employee Retirement Income Security Act of 1974, as amended) fiduciaries will be entitled to “a presumption of prudence” when they “objectively, thoroughly, and analytically consider” six factors in selecting DIAs for a participant-directed individual account plan. These factors are not exclusive, however. Other factors may be relevant and may be raised in challenging any presumption. To preserve the presumption, the proposal expressly contemplates that fiduciaries will document their compliance with each factor in connection with each DIA selection.

Meeting the safe harbor conditions should be relatively straightforward with traditional investments. But we suspect meeting those conditions, especially the liquidity and valuation conditions, will be more challenging with alternatives, many of which are illiquid and less transparent. We discuss each condition in further detail in the following subsections.

1. Performance

The fiduciary must “consider a reasonable number of similar” alternatives and determine that the investment’s “risk-adjusted expected returns […] over an appropriate time horizon and net of anticipated fees and expenses,” further the plan’s purposes “by enabling participants […] to maximize risk-adjusted return[s].” Any performance review must take into account economic, market, sector, investment-specific, and counterparty risks, as well as participant risk capacity. Time horizons must reflect the actual needs of the participant population. As a result, it is often prudent to give more weight to long-term historical performance over short-term results. Fiduciaries have discretion to choose the applicable considerations in making investment decisions, and they need not select the investment with the highest returns or focus exclusively on expected returns.

2. Fees

The fiduciary must “consider a reasonable number of similar alternatives and determine that the fees and expenses […] are appropriate, taking into account […] risk-adjusted expected returns […] and any other value” the investment provides to participants, including “benefits, features, or services” beyond “risk-adjusted returns.” Fiduciaries do not need to select the lowest-fee option available or compare a given option against “every similar alternative” in the marketplace. A fiduciary may prudently pay more in exchange for better service or risk mitigation features that are appropriate for the plan’s participant population (e.g., selecting a higher fee index fund due to superior participant service and communications). But a fiduciary that selects a more expensive share class that is otherwise identical to a less expensive, available share class without considering the fee differences would likely breach their duty of prudence.

3. Liquidity

The fiduciary must determine that the investment has “sufficient liquidity to meet [the plan’s] anticipated needs […] at both the plan” (e.g., temporary restriction on redemptions) “and individual levels” (e.g., financial hardship withdrawal). Fiduciaries are not required to “select only fully liquid” options, as a prudent process may justify sacrificing a level of liquidity in exchange for higher risk-adjusted returns.

When investing in registered open-end funds (e.g., mutual funds and exchange-traded funds), fiduciaries may satisfy this requirement by relying on written representations from the open-end fund’s manager stating that the fund has adopted a liquidity risk management program that satisfies rule 22e-4 under the Investment Company Act of 1940, as amended (the Liquidity Rule). Similarly, when investing in registered funds that are not subject to the Liquidity Rule, collective investment trusts, and other non-registered funds, the fiduciary may satisfy this requirement by relying on written representations from the relevant trustee/manager expressing that the vehicle has adopted “a liquidity risk management program that is substantially similar” to what is required of open-end funds. Another example involves balancing the liquidity restrictions of a guaranteed deferred annuity against the certainty and value of guaranteed lifetime payments and prudently determining that the restrictions are justified by the value provided to participants.

Registered closed-end funds and non-registered (private) funds are not subject to the Liquidity Rule. Managers of such funds generally would not structure their funds to meet those requirements, much less certify to investing plans that the funds have adopted liquidity management programs “substantially similar” to what is required of open-end funds. Further, most registered funds that offer substantial exposure to private markets are classified as closed-end funds and thus do not offer the level of liquidity that is required of open-end funds under the Liquidity Rule. So, a plan fiduciary considering investing in such a vehicle would need to conduct due diligence, either on its own or with the help of a qualified “investment advice fiduciary, to assess whether [the vehicle] is sufficiently liquid” considering the plan’s liquidity needs, and it must determine that the investment “appropriately balances future liquidity needs” of the plan with the “increased risk-adjusted return on investment net of fees.”

4. Valuation

The fiduciary must determine that the investment vehicle “has adopted adequate measures to ensure” timely and accurate valuation consistent with the plan’s needs. It may rely on exchange-derived valuations for publicly traded assets and independent, conflict-free valuation processes for non-public assets (e.g., Financial Accounting Standards Board Accounting Standards Codification 820 fair valuation standards) supported by written representations from the manager. The fiduciary should not invest in a fund whose manager is relying on proprietary valuation methods when facing heightened valuation conflicts (e.g., acquisition from an affiliated vehicle).

5. Benchmarking

The fiduciary must determine that each investment “has a meaningful benchmark” — defined as a comparator with similar mandates, strategies, objectives, and risks — and compare the investment’s risk-adjusted expected returns net of fees against that benchmark. There could be more than one meaningful benchmark, and no single benchmark will fit all investments. When identifying a meaningful benchmark, “there is no presumption or preference against new or innovative [DIA] design[s],” and fiduciaries should identify the most appropriate available comparators and scrutinize their value propositions. A positive example includes the use of a custom composite benchmark for an asset allocation fund with a private equity (PE) sleeve that matches the underlying assets of the DIA and uses commonly accepted PE performance measurement methodologies, such as internal rate of return and public market equivalent methods, that are explained in writing and reviewed by the fiduciary.

6. Complexity

The fiduciary must consider the investment’s complexity and determine whether it possesses sufficient “skills, knowledge, experience, and capacity” to understand the investment “sufficiently to discharge its obligations under ERISA” and the plan’s governing documents — or, alternatively, whether it must obtain qualified assistance (e.g., from an investment advice fiduciary). A positive example includes a pooled vehicle with investment in underlying private assets that “use[s] [a] sophisticated and variable fee-based incentive structure[] […] including management fees and […] carried interest.” The fiduciary could conduct the relevant due diligence on the fees or obtain a written representation from the pooled vehicle’s manager confirming “that none of the underlying fees will be passed through to the plan” and that the plan will pay only a flat assets under management–based fee. A negative example involves a fiduciary that selects “a managed account service designed to create a customized portfolio” for each participant. But the fiduciary does not understand how it works and provides only each participant’s age (and does not provide additional information about each participant’s unique financial circumstances that the service requires), and “as a result, the service creates a portfolio for each participant that is materially similar” to a less expensive target-date fund.

Legality of the Safe Harbor

Even if the proposal is finalized and fiduciaries can meet the safe harbor conditions, the safe harbor may prove illusory, as the courts may afford it no legal weight. In Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), the U.S. Supreme Court overturned Chevron U.S.A, Inc. v. NRDC, 467 U.S. 837 (1984) and its tiered deference to agency legal interpretations, holding that agency interpretations, even in formal regulations, are not entitled to deference in the absence of congressional direction. Here, no such direction exists. The omission could be viewed as intentional, too, when contrasted with ERISA section 404(c)’s express fiduciary safe harbor (and its direction to the DOL to issue regulations) for participant investment elections, including with respect to DIAs.

Anticipating this issue, in the preamble to the proposal, the DOL asserts that the regulation should be entitled to Skidmore deference. In Skidmore v. Swift and Co., 323 U.S. 134 (1944), the Supreme Court held that deference may be given to agency interpretations depending upon all factors that give it persuasive power. How such deference would work, analytically, to create a presumption of prudence carrying legal weight is unclear. Perhaps the DOL believes that the courts will imply their own presumption into ERISA, notwithstanding the lack of statutory direction to that effect and the existence of other, express safe harbors addressing additional issues.

In the preamble, the DOL also takes the position that ERISA section 505 grants the DOL statutory authority to “promulgate safe harbors […] regarding the fiduciary duty of prudence.” The DOL cites McNeil v. Time Insurance Co., 205 F.3d 179, 190 (5th Cir. 2000) in support (holding that creation of “an exemption for certain group or group-type insurance programs from the scope of ERISA” is within the secretary of labor’s “authority to promulgate regulations for implementation of ERISA”). But it is unclear whether the courts will interpret ERISA section 505 the same way when it comes to issuing a safe harbor regarding compliance with the fiduciary duty of prudence under ERISA section 404(a).

Even if finalized, upheld, and found to have legal weight, the utility of the safe harbor will be limited. By its terms, the safe harbor applies only to DIA selection, not the attendant fiduciary’s duty to monitor selections on an ongoing basis. While the DOL states that it will address monitoring separately in the future, and any such guidance is expected to track the principles laid out in the proposal, the omission of monitoring from the safe harbor will leave all but the most recent DIA selections open to challenge under the existing legal framework.

Brokerage Windows Excluded

The proposal does not apply to self-directed brokerage windows or any other similar arrangements under plans or investments made available or selected by participants therein.

The Practical Effect of the Proposal on Alternative Investments as DIAs

Private fund sponsors and other providers are already marketing alternative investments to plan fiduciaries and participants. We expect the proposal to bolster those marketing efforts, even before it is finalized. Those efforts may well result in growing consideration (and potentially adoption) of such alternatives by plan fiduciaries, particularly if providers can demonstrate how their products’ characteristics are consistent with the safe harbor conditions.

Even if the proposal is finalized and the courts agree that it carries legal weight (which may take years to sort out), we do not think the proposal will usher in a sea change in plan fiduciary practices with respect to alternative investments in DIAs. However, we expect sophisticated plan fiduciaries and fiduciary consultants to generally remain cautious, incorporating alternatives, if at all, incrementally and mostly as a component of professionally managed target-date and other pooled fund DIAs. We also expect that even more adventurous fiduciaries will find themselves constrained by their ability to satisfy the safe harbor’s liquidity and other conditions with many alternatives.

Regulatory Comment Period

Comments on the proposal are currently due to the DOL by June 1, 2026.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.