Key Points: As you might expect, the Valuation factor requires that fiduciaries determine that private, illiquid investments must be fairly valued. It is probably not expected, though, that liquid investments, e.g., mutual funds and CITs holding only publicly traded securities, are also subject to the Valuation factor.
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 five of the factors—Performance, Fees, Performance Benchmarks, Complexity, Liquidity, and their examples.
I now turn to the Valuation factor, which like the Liquidity factor is particularly important for the evaluation of private funds and other non-publicly traded assets. This article discusses the factor itself. Follow up articles will cover the examples. The proposed regulation describes the Valuation factor as:
(j) Valuation. 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.
(The bolding in this article is mine…just to emphasize the points that I consider the most important.)
The preamble to the proposal discusses the factor in a little more detail:
8. Valuation
8.1. The Standard
Paragraph (j) of the proposed regulation identifies valuation as a factor for fiduciary consideration in selecting designated investment alternatives. It provides that 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. For illustrative purposes, paragraph (j) also contains four examples in which plan fiduciaries apply this factor in connection with selecting a designated investment alternative.
Comment: The proposed regulation applies only to ERISA-governed, participant-directed plans. That means that accurate valuation of the plan’s investments is critical. When participants direct that investments be purchased for their accounts, the investments must be priced properly so that they pay no more than a fair amount; and when investments are sold, they should be sold at the right price so that those participants aren’t short changed.
We have taken for granted that mutual funds and CITs that hold publicly traded securities are properly valuing those assets on a timely basis. And in my experience, they have been.
However, the introduction of non-publicly traded investments—most likely as allocations in TDFs, balanced funds or managed accounts—increases the focus on valuation. An improper valuation, if discovered, will be difficult and expensive to correct. I have been involved in those types of corrections, and they are a lot of work…and costly.
The proposed rule goes beyond that, though. It requires that plan fiduciaries—and therefore their advisers—evaluate the valuation methods for all investments in a covered plan’s lineup. Think about that. Are you prepared to take the steps necessary to understand and approve of the valuation practices of a plan’s S&P 500 index fund? Or an actively managed international developed markets fund? What about evaluating the valuation methods, policies and practices of CITs? The proposal, if finalized as is, would require consideration of the valuation practices for all designated investment alternatives (DIAs)…the core menu…in a covered plan.
Concluding Thoughts
Undoubtedly, there is more to the Valuation factor than most people anticipate. Fortunately, the examples give helpful guidance. For mutual funds and CITs that hold publicly traded securities, the job will be fairly easy, but it will still be a job.
For private funds and allocations to those funds, the proposal is more problematic.
All of this will be explained in my follow-up articles about the examples.
