In my last post in this series– Alternative Assets (4), I discussed the provision in the DOL’s proposed regulation on the Selection of Designated Investment Alternatives for participant-directed plans (2026-06178.pdf) that requires that “all relevant factors” be considered in the process of making a prudent investment decision. Later in the proposal, the DOL identifies six factors that it views as relevant to almost all investment decisions.  The labels for the six factors are: Performance, Fees, Liquidity, Valuation, Performance Benchmark, and Complexity. Each of those factors is defined in the proposal and each will be a subject of future posts on this blog.  However, I mention them now because each is eligible for a fiduciary safe harbor if a defined process is followed. With regard to the safe harbor, the proposed rule provides:

(f) Safe harbor. Paragraphs (g) through (l) of this section set forth a non-exhaustive list of factors [the six factors], when applicable, that a plan fiduciary that is responsible for establishing and maintaining a plan investment menu of designated investment alternatives for a participant-directed individual account plan must objectively, thoroughly, and analytically consider, and make determinations on, when selecting each such designated investment alternative for the plan investment menu. When a plan fiduciary does so, following the process described in paragraphs (g) through (l) with respect to such factors, which may include relying on recommendations of a prudently selected investment advice fiduciary within the meaning of section 3(21)(A)(ii) of ERISA with respect to a particular factor or factors, or prudently delegating compliance with respect to a particular factor or factors to an investment manager within the meaning of section 3(38) of ERISA, the plan fiduciary’s judgment with respect to the particular factor or factors, including the relationship between the factors, is presumed to have met the duties under section 404(a)(1)(B) of ERISA of such fiduciary and is entitled to significant deference. [The bolding is mine]

Comment: In a nutshell, if a plan sponsor fiduciary and/or an advisor fiduciary follows the processes described in the discussion of the six factors, they will be entitled to a “safe harbor” which is, more precisely, a rebuttable presumption that is entitled to “significant deference” that the fiduciary decision was prudent. The preamble has a lengthy discussion of the authority the DOL argues that it has to provide a regulatory safe harbor (and I am quoting the DOL’s thinking here, but not the lengthy discussion of court decisions in this part of the preamble):  

2.4.4. Decisions Based on a Prudent Process Are Entitled to Significant Deference Including Under the Proposed Regulation’s Safe Harbor Factors ….. In other words, subjecting a fiduciary to constant Monday morning quarterbacking over its decisions, with the benefit of 20/20 hindsight, would eviscerate the discretion that is at the core of the statutory framework. ….. Consequently, a defendant fiduciary that complies with the proposed regulation’s safe harbor factors should, to that extent, be confident that it has fulfilled its fiduciary duty of prudence. And given where the burden lies, a fiduciary that can actively demonstrate that compliance should be able to confidently rely on it to successfully defend its actions. ….. To further assist plan fiduciaries, the Department is proposing this regulation with safe harbors. The Department has clear statutory authority under ERISA section 505 to promulgate safe harbors, including safe harbors regarding the fiduciary duty of prudence… ….. Accordingly, this regulation should carry persuasive weight to courts under Skidmore such that fiduciaries that comply with the regulation should be found to have followed a prudent process with the result that their judgment with regard to the particular factor at issue (including the relationship of that factor to the other factors) is respected. [I added the bolding to emphasize that the safe harbor is not for the overall fiduciary decision, but rather for the decision about the particular factor.  In that sense, there are potentially six safe harbors, one for each factor.]

Comment: In effect, the DOL is saying that litigation over fiduciary breaches has gone too far and that fiduciaries are not being protected adequately when they exercise their fiduciary discretion in selecting investments. The DOL’s objective is to provide greater protection to fiduciaries when making investment decisions.  However, the safe harbor is conditional in at least two regards.  First, the safe harbor only applies to the six identified relevant factors (but it does not apply to the consideration of other relevant factors that should be considered for a particular type of investment). The second condition is that the safe harbor requires that the fiduciaries be “informed” about the considerations for teach factor; if not, the safe harbor for that factor is not available.  In my view, there are three steps to becoming “informed”; those are: the fiduciaries must identify the information that a knowledgeable investor would want to review for a particular investment; then the fiduciaries must gather that information; and finally they must evaluate that information “objectively, thoroughly and analytically”.  When that process is followed, the proposed rule says that any resulting decision is presumed to be prudent. As a comment, I expect that, once the regulation is finalized, there will be a challenge to the DOL’s authority to grant a regulatory safe harbor of this type.  The key question is whether this regulation limits the scope of the prudent person rule of ERISA.  In a sense, it does.  But the Secretary of Labor clearly has the authority to issue regulations under ERISA.  Section 505 says in relevant part: “…the Secretary may prescribe such regulations as he finds necessary or appropriate to carry out the provisions of this subchapter. Among other things, such regulations may define accounting, technical and trade terms used in such provisions; may prescribe forms; and may provide for the keeping of books and records, and for the inspection of such books and records….” While the first sentence is broad in scope, the second sentence could be read as being more limiting. In any event, section 505 was not broad enough to allow the DOL to write a new regulation defining fiduciary advice, so it may not be broad enough to allow a grant of a fiduciary safe harbor.   Concluding Thoughts In the opinion of many observers, this is the primary objective of the proposed regulation that is, to create a safe harbor for the purpose of limiting future lawsuits about fiduciary breaches for investment selection. However, this provision—the safe harbor—will almost certainly be litigated once the rule is final.  So, from that perspective, we are in the early chapters of this book. Another objective is to encourage plan fiduciaries to consider a wider range of investments where they may be advantageous to participants. That includes, of course, alternative investments, which were the focus of the White House’s Executive Order that started this string of events. Even there, though, we may ultimately find that the DOL would have been more effective by providing guidance on the selection and monitoring of investment managers and fund managers of target date funds and participant managed accounts. I say that because the most likely avenue for inclusion of alternative assets in participant-directed plans will be target date funds and managed accounts.