Key Point: The DOL’s example will allow plan fiduciaries to rely on written representations by investment managers. I don’t like the concept of relying on representations by people who will make money if plan fiduciaries say “yes” but won’t if they say “no”.  While this approach may be protective of fiduciaries, I don’t think it is protective of participants.

In that vein, I wouldn’t be surprised to see multiple-page, fine print, representations with exceptions galore, being given to plan fiduciaries.

The DOL’s proposed regulation on selecting investments, including alternative assets, 2026-06178.pdf, identifies six factors that should be considered in the process of selecting any investments for participant-directed plans, such as 401(k) plans and private sector 403(b) plans. The six factors are: Performance, Fees, Liquidity, Valuation, Performance Benchmark, and Complexity. The proposal describes each of those factors and provides 20 examples of their application.

In earlier posts, I covered four of the factors—Performance, Fees, Performance Benchmarks and Complexity, and their examples.

In my last four articles, Alternative Assets (22), Alternative Assets (23), Alternative Assets (24), Alternative Assets (25) and Alternative Assets (26), I looked at the Liquidity factor and examples of the application of that factor.  This article discusses the fourth example.

(4) Example. Participant and plan- level liquidity—

(i) Facts. A participant-directed individual account plan offers a designated investment alternative that is a pooled investment vehicle with an investment strategy involving target positions in particular types of assets, including holdings in private assets. According to written representations from the person responsible for managing the product, it is structured so that the timing of the product’s ability to liquidate private-asset investments aligns generally with the redemption rights of plans investing in the product. Representations also are made that the product permits quarterly redemptions by investors and does not otherwise impose any specific limits or restrictions on timing or payment of redemptions. For individual participants, representations are made to the plan fiduciary that the designated investment alternative has adopted and implemented a liquidity risk-management program that imposes requirements substantially similar to the requirements related to liquidity risk management programs for mutual funds registered as open-end management investment companies with the SEC under the Investment Company Act of 1940. The fiduciary reads, critically reviews, and understands the written representations and consults a third- party investment advice fiduciary within the meaning of section 3(21)(A)(ii) of ERISA. The fiduciary does not know, or have reason to know, other information which would cause the fiduciary to question the written representations.

(The bolding in this article is mine…just to emphasize the points that I consider the most important.)

Comment: My reading of the example is that the investment product allows for daily trading by participants (or at least that the investment has policies to do that).  However, it appears that the pooled investment vehicle may only be able to liquidate its holdings in private funds on a quarterly basis (and perhaps not even that often if the holding is substantial and the private funds have quarterly limited gate ways).  The point of the example is that the plan fiduciaries receive, evaluate and accept the liquidity representations from the investment’s manager.  In other words, there is a bit of a fiduciary safe harbor for the representations in the sense that the plan fiduciaries do not need to do an investigation beyond the representations (if reviewed as described).

(ii) Analysis.

The example in paragraph (i)(1) of this section clarifies that plan fiduciaries must appropriately consider the potential participant-level events that may trigger a plan’s need for immediate liquidity, and must determine that the designated investment alternative, at the time of selection, will have sufficient liquidity to meet the anticipated liquidity needs of the plan. Similarly, the example in paragraph (i)(3) of this section clarifies that plan fiduciaries must appropriately consider, and determine, that the scope and duration of redemption restrictions at the plan level meet the anticipated needs of the plan.

Comment: The Analysis doesn’t add anything other than explaining that earlier Liquidity examples are consistent with the process for this example.

(iii) Conclusion.

A plan fiduciary is deemed to have met the consideration and determination requirements of paragraph (i) of this section, and section 404(a)(1)(B) of ERISA, with respect to the participant-level and plan-level liquidity needs of a given plan in connection with a given designated investment alternative when the fiduciary determines within its discretion that the redemption structures under the product are appropriate to the needs of the plan after giving due consideration, including, where applicable, with the benefit of analysis of professional advisors, to the specific needs of the plan, including its need to maximize risk-adjusted return on investment.

Comment: And the Conclusion doesn’t add much.  In effect, the Conclusion affirms that, if plan fiduciaries follow the definition of the Liquidity factor as illustrated in the example, the fiduciaries will be entitled to a “safe harbor” for the prudence of their decision.  To me, the real significance of this example is that fiduciaries can, absent conflicting knowledge, rely on representations of the managers of investments.  I am worried about that.  There is an obvious conflict because if a plan invests in the fund, the manager will make money, but if the plan doesn’t invest in the fund, the manager will not earn any fees from that plan.

In that context, the traditional fiduciary approach is that fiduciaries must evaluate the conflict of interest and make an independent determination that participants will not be harmed by the conflict.  Apparently, the DOL is willing to waive that part of the process in order to protect fiduciaries.

The preamble discusses this example as follows:

Paragraph (i)(4) of the proposed regulation provides an example that demonstrates a prudent evaluation of liquidity at both the participant and plan level with respect to a pooled investment vehicle that trades liquidity for the ability to diversify into alternative investments to achieve better risk-adjusted returns net of fees. In this example, the plan fiduciary is considering selecting as a designated investment alternative a fund that only permits quarterly redemptions at the plan level but provides daily liquidity to individual participant investors. This liquidity restriction on the plan provides flexibility for the designated investment alternative’s manager, and the fund allocates a portion of its holdings to private assets, some or all of which are illiquid.

The fiduciary obtains representations that the designated investment alternative has adopted and implemented a program that imposes requirements substantially similar to the requirements related to liquidity risk management programs for mutual funds. The timing of the liquidity management is designed to ensure the fund can meet the redemption rights of participating plans while providing plan participants with daily liquidity. Just as in the other examples, the fiduciary reads and critically reviews the written representations, and the fiduciary consults a third-party investment advice fiduciary. The fiduciary also does not know, or have reason to know, other information which would cause the fiduciary to question the written representations. In this case, the fiduciary, after an objective, thorough, and analytical evaluation, determines that the redemption structure of the product is appropriate for the needs of the plan and its participants, and the plan-level liquidity tradeoffs are worth the expected increase in risk-adjusted return net of fees. As the example notes, this analysis may benefit from the assistance of a professional adviser or advisors.

Comment:

The preamble discussion is helpful.  It makes clear that the investment allows for daily trading by participants, but only quarterly liquidations at the plan level (e.g., to remove the investment from the plan’s lineup.

It also makes clear that fiduciaries must perform a “benefit/burden” evaluation to determine whether the value of the investment is enough to offset any burdens due to the limited liquidity.  That makes sense to me.

However, I am concerned about the conflict of interest where plan fiduciaries can rely on representations by conflicted investment managers without any consideration of the conflict. I wouldn’t be surprised to see multiple-page, fine print, representations with exceptions galore, being given to plan fiduciaries.

Concluding Thoughts

As you can tell by now, I don’t like the concept of relying on representations by people who will make money if plan fiduciaries say “yes” but won’t if they say “no”.  While this approach may be protective of fiduciaries, I don’t think it is protective of participants.