US Department of Labor Proposes Landmark Rule Democratizing Access to Alternative Investments in 401(k) Plans

The U.S. Department of Labor (the DOL) has published its long-awaited proposed rule on selecting alternative investments in participant-directed 401(k) plans (the Proposed Rule). If finalized, the Proposed Rule would establish a safe harbor process for the selection of any designated investment alternative, including an alternative asset investment option. The Proposed Rule provides for a sixty-day notice and comment period but does not include a proposed applicability date.

The Proposed Rule’s safe harbor process is asset neutral—it applies when selecting any type of investment, not just alternative assets, and does not encourage the selection of one asset class over another.

Under the safe harbor process, when selecting investment alternatives, a fiduciary would need to consider and make a determination regarding each of the following six factors: performance, fees, liquidity, valuation, performance benchmarks, and complexity. A fiduciary’s judgment with respect to a factor is presumed to satisfy section 404(a)(1)(B) of the Employee Retirement Income Security Act of 1974 (ERISA) if the fiduciary follows the process described for the specific factor.

Background: The Executive Order

As discussed in our prior blog post, President Trump signed an executive order (the “EO”) in August 2025, directing the DOL, the Securities and Exchange Commission (the “SEC”), and the Department of the Treasury (including the Internal Revenue Service) to review and revise guidance and regulations to facilitate the inclusion of alternative investments—such as private equity, cryptocurrency, and other nontraditional assets—in participant-directed 401(k) defined contribution (“DC”) retirement plans. The EO states that it is the policy of the United States that “every American preparing for retirement should have access to funds that include investments in alternative assets when the relevant plan fiduciary determines that such access provides an appropriate opportunity for plan participants and beneficiaries to enhance the net risk-adjusted returns on their retirement assets.”

Although the EO directed DOL to focus guidance on fiduciary responsibilities in connection with offering an asset allocation fund that includes investments in alternative assets, DOL decided not to limit the Proposed Rule to such funds to emphasize that alternative assets are subject to the same requirements as any other investment.

The Proposed Rule: The Duty of Prudence

The Proposed Rule reinforces that the selection of a designated investment alternative is a fiduciary act for which fiduciaries have maximum discretion. The Proposed Rule and the DOL’s accompanying press release emphasize that ERISA’s duty of prudence is process-based and does not require or restrict any specific type of asset.

When selecting a designated investment alternative, the Proposed Rule clarifies that a fiduciary has a duty to consider all relevant factors to enable participants and beneficiaries to maximize risk-adjusted returns, net of fees, on investments across their entire portfolio in the plan.

The Proposed Rule focuses on the duty of prudence as applies to a fiduciary’s selection of a single designated investment alternative. However, the Proposed Rule reminds fiduciaries that ERISA’s duty of prudence also applies when establishing a diversified menu of designated investment alternatives. A fiduciary has a duty to prudently curate a menu of investments that allows participants with different risk capacities to maximize their returns for a given level of risk.

The Proposed Rule: The Safe Harbor Process

The Proposed Rule establishes a safe harbor process rather than mandating the selection of specific designated investment alternatives. DOL explains that such an approach is consistent with relevant case law and past DOL practices that reflect a fiduciary’s discretion and flexibility in selecting among a range of permissible options.

Under the safe harbor process, when a plan fiduciary objectively, thoroughly, and analytically considers any of the six factors and makes a determination following the described process, its judgment regarding that factor is presumed to satisfy section 404(a)(1)(B) of ERISA and should be entitled to significant deference. The list of six factors is not exhaustive and the applicability of a particular factor will vary depending on the specific facts and circumstances. 

1. PERFORMANCE:  A fiduciary must consider the performance of a reasonable number of similar investment alternatives over an appropriate time-horizon and conclude that the designated investment alternative will maximize risk-adjusted returns, net of fees and expenses.

Risk Adjusted Returns - A fiduciary must consider the risks investors are exposed to with respect to the designated investment alternative as well as the risk capacity of the plan’s participants. Thus, only risk-adjusted returns, not pure expected returns, are relevant to evaluating a designated investment alternative.

Appropriate Time Horizon – A fiduciary must consider the time horizon of the plan’s participants and may give greater weight to long-term historical performance given the long-term nature of retirement savings.

2. FEES: A fiduciary must consider the fees and expenses of a reasonable number of similar alternatives and conclude that the fees of the designated investment alternative are appropriate considering the risk-adjusted return plus any other “value” of the designated investment alternative. Value includes any benefits, features, and services other than risk-adjusted returns.

Higher Fees - All else being equal, a process is not imprudent solely because the fiduciary selected an investment alternative with higher fees and expenses provided the fiduciary relies on the value proposition justifying the higher fees and expenses. Higher fees and expenses may be justified by superior customer service, reduced volatility during a market downturn, diversification, and features such as lifetime income.  

3. LIQUIDITY: A fiduciary must determine that the designated investment alternative will have sufficient liquidity to meet the plan’s anticipated needs at both the plan-level and participant-level. The Proposed Rule clarifies that because participant-directed individual account plans are long-term retirement savings vehicles, particularly for participants early in their careers, there is no requirement that a fiduciary select only fully liquid products.

Participant-Level Liquidity: At the participant-level, liquidity needs depend on the plan’s features such as loans or hardship withdrawals, the profile of the plan’s participants as a whole such as age and participant turnover, and to the extent they are different, the profile of participants who are likely to select the particular designated investment alternative.

The Proposed Rule provides the following examples for evaluating participant-level liquidity:

Registered Mutual Funds - If the designated investment alternative is a mutual fund registered as an open-end management investment company with the SEC (a “Registered Mutual Fund”) under the Investment Company Act of 1940 (the “1940 Act”), a fiduciary may rely on the written liquidity and risk management program. The Proposed Rule explains that such reliance is a prudent process because a Registered Mutual Fund is required by the 1940 Act to adopt and implement a written liquidity risk management program that is designed to assess and manage its liquidity risk. This process may be used to evaluate plan-level liquidity for Registered Mutual Funds.

Non-Mutual Funds - If the designated investment alternative is not a Registered Mutual Fund, a fiduciary is deemed to satisfy the requirements of section 404(a)(1)(B) of ERISA for evaluating participant-level liquidity if the fiduciary satisfies three conditions: (1) the fiduciary obtains written representation that the investment manager has implemented a liquidity risk management program that is substantially similar to a program that meets the 1940 Act’s requirements; (2) the fiduciary critically reviews and understands the written representation after consultation with a qualified professional, where appropriate; and (3) the fiduciary does not know, or have reason to know, information that would cause the fiduciary to question the representation. This process may be used to evaluate plan-level liquidity for non-mutual funds.

Lifetime Income - A fiduciary must conclude that the lack of liquidity is justified by a commensurate expected increase in return on investment or certainty with respect to future payments.  

Plan-level liquidity: At the plan-level, liquidity needs may depend on expectations regarding changes in recordkeepers, mergers and acquisitions of the plan sponsor, and plan termination. A fiduciary must evaluate any redemption restrictions at the plan-level and any process in place to balance the plan's potential need for withdrawal against the plan's desire for to maintain smooth and consistent target positions and determine that such restrictions and processes are sufficient to meet the anticipated needs of the plan.

The Proposed Rule provides the following example for evaluating plan-level liquidity:

Pooled Investment Vehicles -  A fiduciary may utilize the liquidity risk management program framework for non-mutual funds described in the participant-level section to evaluate plan-level liquidity of pooled investment vehicles. Alternatively, a pooled investment vehicle is deemed to have adequate plan-level liquidity if a fiduciary evaluates the following and concludes that the pooled investment vehicle will appropriately balance liquidity restrictions at the plan-level with the anticipated needs of the plan:

1. 1. 1. 1. 1. 1. 1. The maximum that the designated investment alternative will allocate to illiquid investments;
                  2. The time until such investments could likely be sold without reducing their value, the time until such investments will return capital to their investors;
                  3. The scope and duration of the restrictions on the plan; and
                  4. The plan’s potential need for withdrawal.

4. VALUATION: A fiduciary must appropriately consider and determine that the designated investment alternative has adopted adequate measures to ensure that it is capable of being timely and accurately valued  through an independent and conflict-free process in accordance with the needs of the plan.

The Proposed Rule provides the following examples for evaluating the adequacy of a designated investment alternative’s valuation:

Public Exchanges – The valuation of a designated investment alternative whose underlying securities are traded daily on a public exchange regulated under section 6 of the Securities Exchange Act of 1934 or similar public exchange (a “Public Exchange”), is adequate if the prospectus indicates that the designated investment alternative’s value is determined in all material respects by reference to the price of the security as reflected on the Public Exchange at the time of the valuation.

Non-Publicly Traded Securities – The valuation of a designated investment alternative that contains both non-publicly traded and publicly traded securities is adequate if the fiduciary obtains written representation from the investment manager that the non-publicly traded securities are valued through a conflict-free, independent process no less frequently than quarterly, according to procedures that satisfy the Financial Accounting Standards Board Accounting Standards Codification 820 on Fair Value Measurements (or any successor standard). The Proposed Rule clarifies that a continuation fund managed by an entity that is permitted to purchase assets from an investment vehicle managed by an affiliate of the entity based on the entity’s proprietary valuation methods is not a conflict-free and independent process.

Registered Mutual Funds – The valuation of a Registered Mutual Fund that contains both publicly traded and non-publicly traded securities is adequate if the fiduciary reads the Registered Mutual Fund’s publicly available audited financial statements and valuation related disclosures, including the Form N-1A to confirm that a majority of the board is independent.

Note, with respect to non-publicly traded securities and registered mutual Funds, the fiduciary must critically review and understand the relevant material after consultation with a qualified professional, where appropriate, and not know, or have reason to know, information that would cause the fiduciary to question the veracity of the relevant material.

5. PERFORMANCE BENCHMARKS: A fiduciary must determine what each designated investment alternative’s meaningful benchmark is and compare the designated investment alternative to the meaningful benchmark as a means of evaluating the risk-adjusted expected returns, net of fees.

The Proposed Rule defines “meaningful benchmark” as an investment, strategy, index, or other comparator that has similar mandates, strategies, objectives, and risks to the designated investment alternative. A meaningful benchmark may include custom composite benchmarks. For example, a meaningful benchmark for a Registered Mutual Fund containing publicly traded securities and a private equity sleeve may include a composite benchmark that blends the performance of broad-based securities market indices with methodologies commonly used by investment professionals for the private equity sleeve, including the internal rate of return method and a public market equivalent method.

However, the Proposed Rule emphasizes that there is no presumption against selecting a new or innovative product design as a designated investment alternative. When considering a new or innovative product design, a fiduciary should identify the best possible meaningful benchmarks while also evaluating the potential value proposition presented by the new or innovative design.  

6. COMPLEXITY: A fiduciary must appropriately consider the designated investment alternative’s complexity and determine that they have the skills, knowledge, experience, and capacity to comprehend, evaluate, and operationalize the designated investment alternative. To the extent a fiduciary is unable to meet that standard with respect to a designated investment alternative, the fiduciary must seek assistance from a qualified investment advice fiduciary as defined in section 3(21)(A)(ii) of ERISA, an investment manager as defined in section 3(38) of ERISA, or another individual.

WHAT PLAN FIDUCIARIES SHOULD DO NOW

As the proposed rule moves toward finalization, plan sponsors and fiduciaries should:

1. 1. Review your Plan’s Investment Selection Criteria to ensure that your processes consider the six factors identified by the Proposed Rule. While the safe harbor process is not mandatory, deviation from the process may expose the plan to heightened litigation risks.
   2. Update your Plan’s Investment Policy Statement to reflect any contemplated changes related to alternative assets, including criteria for manager selection, valuation procedures, liquidity requirements, and benchmarking.
   3. Assess your Plan’s Governance and Expertise to determine whether your investment committee has the background and resources to evaluate each designated investment alternative, including alternative-assets, or whether delegation to an investment advice fiduciary or investment manager, commonly referred to as an Outsourced Chief Investment Officer (OCIO), is necessary. A growing number of DC plan fiduciaries are delegating the selection and monitoring of designated investment alternatives to OCIOs who may have the expertise and tools necessary to evaluate whether and in what capacity alternative assets are in the best interests of DC plan participants.
   4. Consult Investment Managers with expertise in alternative assets to determine whether, and in what form, alternative investments are appropriate for your DC plan participant population.
   5. Monitor ERISA litigation developments, including the Supreme Court's pending decisions in Intel (401(k) alternative-asset allocation) and Parker-Hannifin (meaningful benchmark standards), which will shape how courts assess fiduciary decisions in this space.
   6. Evaluate Approaches to alternative assets implemented by other plans. State and local government plans have been early adopters of alternative asset investment funds. While these plans are not governed by ERISA, they offer insight into how investment managers are approaching the design of alternative asset sleeves for individual investors in DC plans.

Please contact a member of the Winston & Strawn Employee Benefits & Executive Compensation Practice or your Winston relationship attorney for further information.