Key Points: Can fiduciaries trust the daily valuations of the mutual funds in a plan’s core lineup for participant direction?  Yes, but.  Fiduciaries are only given valuation “relief” if they review mutual fund documents and, on that basis, determine that the valuations are based on trades in public exchanges.

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, and Liquidity, and their examples.

My last post, Alternative Assets (28), described 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 first example under the Valuation factor:

• Valuation; Public exchanges—

(i) Facts. A participant-directed individual account plan offers a designated investment alternative that allows participants to acquire shares of a mutual fund registered as an open-end management investment company with the SEC under the Investment Company Act. Except for necessary cash reserves for operating expenses, all the underlying investments of the designated investment alternative trade daily on a public exchange. The exchange is a national securities exchange which is regulated under section 6 of the Securities Exchange Act of 1934.

(The bolding in this article is mine…just to emphasize the points that I consider the most important. And citations are omitted for readability.)

Comment: There isn’t anything remarkable here—except the “requirement” that mutual funds that invest exclusively in publicly traded securities and cash reserves are subject to the DOL’s proposed valuation requirements.  (Technically, the proposal’s provisions aren’t requirements.  Instead, they are the conditions that need to be satisfied to obtain the protection of a fiduciary safe harbor.  In my view, though, all plan sponsors and fiduciaries will want that protection and, as a result, the regulation provisions will, in effect, be de facto requirements.)

The example “facts” is the DOL’s analysis:

(ii) Analysis. For purposes of determining the prudence of an investment, plan fiduciaries may rely on asset valuations derived from a national securities exchange or another similar, public exchange to the extent the exchange constitutes a generally recognized market through which the value of the investment is readily and accurately determinable in a timely manner.

Comment: Well, that’s not so bad.  To be conservative, it would be a good idea for fiduciaries, with the help of their advisers, to make a finding that the mutual funds in the lineup satisfied that standard and to record that finding—that is that all of the fund’s investments are either cash or securities traded on a public exchange, and the basis for the finding, in committee minutes.

The example concludes:

(iii) Conclusion. The plan fiduciary is deemed to have met the consideration and determination requirements of paragraph (j) of this section, and section 404(a)(1)(B) of ERISA, with respect to this designated investment alternative, provided that the alternative’s organizational documents or prospectus indicate that its value is determined in all material respects by reference to the price of the security as reflected on the exchange at the time of the valuation.

Comment: Expanding on my comment about the Analysis, the DOL’s conclusion directs fiduciaries to specific documents—a fund’s prospectus or organizational documents.  A reasonable approach would be for a committee to obtain copies of those documents—probably with the help of the plan’s adviser, and then to put in the meeting minutes that the committee had obtained and reviewed the materials and that, as a result of that review, had determined that the mutual funds satisfied the Valuation factor.

The preamble to the proposal discusses the factor in a little more detail:

Paragraph (j)(1) of the proposed regulation provides an example involving a designated investment alternative that holds investments that trade daily on a public exchange regulated under section 6 of the Securities Exchange Act of 1934, other than cash and cash equivalents. The example clarifies that plan fiduciaries may rely on asset valuations derived from a national securities exchange or another similar, public exchange to the extent the exchange constitutes a generally recognized market through which the value of the investment is readily and accurately determinable in a timely manner. The example concludes that a fiduciary that relies on valuations derived from public exchanges is deemed to have objectively, thoroughly, and analytically determined that the designated investment alternative has adopted adequate measures to ensure that it can be timely and accurately valued in accordance with the needs of the plan. This example therefore is consistent with the view that investors, including fiduciaries, may rely on public exchanges to determine the value of an investment because those exchanges generally incorporate all publicly available information.

Comment: The preamble explains that, if plan fiduciaries satisfy the requirement to review mutual fund documents and determine that the valuations are based on public markets, the fiduciaries will be deemed to have engaged in a compliant process regarding the Valuation factor. To quote…A “fiduciary…is deemed to have objectively, thoroughly, and analytically determined” that the valuations will be done properly.

Concluding Thoughts

There you go…a new job for plan fiduciaries:  gather mutual fund prospectuses and/or organizational documents, review the investments to make sure that all of them are either cash or are traded on public exchanges, review the valuation provisions, and note that the materials say that the funds are valued based on public exchanges.  More work and less fun.  And nothing much gained.

I also wonder if it is possible that even public exchange valuations may be deficient.  For example, what if a thinly traded stock hadn’t traded for several weeks?  I don’t know enough about the securities markets to know if that meets the DOL’s undefined definition of a “similar” public exchange. Hopefully, the final regulation will provide more color on that issue.