In my last post, Alternative Assets (1), I said that a surprise in the DOL’s proposed regulation on
selecting investments was that it went beyond alternative assets and asset allocation
investments, which were the focus of last August’s Executive Order, and instead applied to all
investments in participant-directed plans—both traditional and alternative.
There were other surprises in the proposed regulation. For example, the proposal says:

(c) Prudent fiduciaries have maximum discretion to select investments to further the
purposes of the plan. Section 404(a)(1)(B) of ERISA does not require or restrict any
specific type of designated investment alternative, except insofar as designated
investment alternative might be otherwise illegal. For example, there is no per se rule
respecting investment in alternative assets generally or the inclusion of private market
investments, ….

Comment: The concept of government neutrality on the types of investments for ERISA-
governed retirement plans is not the surprise. The surprise is the wording of “maximum
discretion”. I know what it means conversationally and I think I know the message the DOL is
trying to convey, but as a lawyer, I’m not sure how it applies because it’s not defined in ERISA
or in the proposed regulation. For example, does a fiduciary need to consider the needs and
circumstances of the covered participants—such that fiduciary responsibility limits the
application of the discretion? I would think so and, if so, it would be helpful to have guidance
to that effect.

The discussion in the proposal’s preamble goes a little further, but doesn’t really answer the
question of how fiduciaries should prudently exercise that discretion:

4.2. Fiduciaries Have Maximum Discretion to Select Investments to Further the
Purposes of the Plan— Proposed Paragraph (c)
Paragraph (c) of the proposed regulation addresses the question of whether any
designated investment alternative is per se prudent or imprudent under section
404(a)(1)(B) of ERISA. The text of section 404(a)(1)(B) of ERISA is plainly neutral to types
or classes of designated investment alternatives that a fiduciary selects for the plan
menu, so long as the fiduciary’s selection process adheres to section 404(a)(1)(B)’s
articulated standard of care. Thus, plan fiduciaries have maximum discretion to select
investments to further the purposes of the plan. Paragraph (c) of the proposed
regulation adopts this foundational principle, providing, in relevant part, that section
404(a)(1)(B) of ERISA ‘‘does not require or restrict any specific type of designated

investment alternative.’’ However, the investment discretion ERISA confers on plan
fiduciaries is not a license to ignore other applicable laws. Paragraph (c) of the proposed
regulation reflects this basic principle by clarifying that maximum discretion
notwithstanding, a plan fiduciary is prohibited from selecting a designated investment
alternative that is otherwise illegal. For example, as paragraph (c) of the proposed
regulation clarifies, an investment in a foreign adversary which violates the Specially
Designated Nationals and Blocked Persons List administered by the Office of Foreign
Assets Control of the United States Department of the Treasury is not permitted.
[Footnotes and citations omitted]

Comment: As with the proposed rule, the preamble uses the unfortunate (in my opinion) word
“maximum”. I believe the Department’s intent is to, first, emphasize that ERISA is neutral in it’s
approach to investments in retirement plans. But that doesn’t mean that there aren’t any
rules. In effect, it means that investment decision-making is not up to the government, but
instead is a private sector responsibility for plan fiduciaries (and subject to ERISA’s fiduciary
standards). In that sense, if the fiduciaries make imprudent decisions in selecting the
investment types, they could be subject to personal liability for fiduciary breach. It would be
helpful to know the Department’s views on fiduciary responsibility for selecting investment
types. For example, must fiduciaries consider the needs and circumstances of the workforce
covered by the plan? Must fiduciaries consider the investment knowledge and experience of
the covered workforce? As a best practice, that would be the case, but is it the law?
My view of the DOL’s second intent is that it wants to limit the ability of courts to review the
decisions made by fiduciaries in selecting the types of investments chosen by fiduciaries. For
example, if fiduciaries determine that hard-to-understand investments are appropriate for their
plans, a “maximum discretion” standard would make it hard to challenge that decision. In that
regard, it would be helpful for the DOL to provide additional guidance on (1) the limits on
“maximum discretion” above and beyond illegal investments and (2) the factors that fiduciaries
should evaluate when considering the types of investments that are prudent to offer to
participants (for example, are they appropriate for the demographics of the covered
workforce?).

The Department’s emphasis on investment neutrality is significant and, in my opinion, correct.
However, it doesn’t mean that just because fiduciaries can theoretically do anything that it is
prudent to do everything.

Concluding thoughts

The provisions discussed in this article and my first one are “big picture” guidance. My next
article will be about the DOL’s position that setting the menu of investments is a fiduciary

activity—which makes sense. And it may at least partially answer my questions in this article
about limits on the ability of fiduciaries to select types of investments that are not appropriate
for the covered workforce. Then, I will get into the weeds of the DOL’s expectations for the
factors and processes for selecting any and all investments for participant-directed plans. That
includes both alternative assets (such as private funds) and traditional investments (such as
mutual funds).

The Employee Benefit Security Administration (EBSA) of the US Department of Labor (DOL) has issued a proposed regulation on the selection of investments for participant-directed plans, such as 401(k) plans. 2026-06178.pdf

The Beginning: An Executive Order

The proposal is the direct result of an August 7, 2025 White House Executive Order (EO) entitled “Democratizing Access to Alternative Assets for 401(k) Investors”.  Democratizing Access to Alternative Assets for 401(K) Investors – The White House

The EO defines “alternative assets” as:

• Private market investments, such as private equity and private credit funds, and hedge funds.
• Direct and indirect investments in real estate, including debt associated with real estate.
• Actively managed investment vehicles investing in digital assets.
• Direct and indirect investments in commodities.
• Direct and indirect interests in projects financing infrastructure development.
• Lifetime income investment strategies including longevity risk-sharing pools.

The EO then says, in relevant part:

Within 180 days of the date of this order, the Secretary shall further, as the Secretary deems appropriate and consistent with applicable law, seek to clarify the Department of Labor’s position on alternative assets and the appropriate fiduciary process associated with offering asset allocation funds containing investments in alternative assets under ERISA.  Such clarification must aim to identify the criteria that fiduciaries should use to prudently balance potentially higher expenses against the objectives of seeking greater long-term net returns and broader diversification of investments.  [The bolding was added by me]

In other words, the DOL is ordered to issue guidance on the prudent selection of “asset allocation funds” that include allocations to alternative assets, including the criteria that fiduciaries should use in a prudent process.

The proposed regulation is responsive to that order and, in fact, goes beyond it by describing the criteria that apply to all investments for participant-directed plans, including both alternative assets and traditional assets (such as mutual funds and collective investment trusts).  That means that fiduciaries of plans that don’t include alternative investments need to pay attention to this proposal as well.

Also, while the EO limited itself to allocations to alternative investments as parts of asset allocation investments and strategies, the proposal is much broader….it covers the selection of standalone alternative investments.

Realistically, though, plan sponsors may choose not to add alternatives (such as private funds) as standalone options.  Instead, at least for the foreseeable future, they are more likely to allow alternatives to be included in asset allocation funds and strategies, such as target date funds and managed participant accounts.  In that case, the likely course of action would be to transfer the job of prudently evaluating and acting on the criteria identified by the DOL to the 3(38) investment managers of those funds and strategies.

The EO also expressed the White House’s concerns about “frivolous” lawsuits against plan fiduciaries and directs the DOL go take steps to reduce that risk:

The Secretary shall also propose rules, regulations, or guidance, as the Secretary deems appropriate, that clarify the duties that a fiduciary owes to plan participants under ERISA when deciding whether to make available to plan participants an asset allocation fund that includes investments in alternative assets, which rules, regulations, and guidance may include appropriately calibrated safe harbors.  In carrying out the directives in this section to further the policy set forth in this order, the Secretary shall prioritize actions that may curb ERISA litigation that constrains fiduciaries’ ability to apply their best judgment in offering investment opportunities to relevant plan participants. [I added this bolding too]

The proposed regulation also addresses that part of the EO by developing a fiduciary “safe harbor” that will, once the regulation is finalized (and if it survives court challenges), be more protective of plan fiduciaries. However, notwithstanding the label, the protection is not a safe harbor as that term is commonly used; instead, it is a conditional and rebuttable presumption. (The details of the safe harbor are for a future article.  This article is just an overview.)

The Proposed Regulation

The proposal responded to the White House EO by describing the criteria (or, at least, some of the criteria) for selecting alternative assets and by developing a presumption that the EBSA refers to as a safe harbor.

As I will explain in a future article, the proposed regulation identifies six factors that the DOL says are common to the consideration of all investments, alternative and traditional, for participant directed plans.  In addition, it says that there may be other “relevant” factors beyond those six.  (A “relevant” factor is one that a knowledgeable investor would decide is material to making a decision about a particular investment.) Fiduciaries must consider all relevant factors in making a prudent investment decision.  As the DOL explains, that involves identifying the criteria for evaluating a particular investment, and then obtaining and evaluating that information.  In some cases, the information and its evaluation may exceed current investment practices—but that is for a future article.

Concluding thoughts

That’s it for now.  There is much to talk about.  My next post will be about other surprises in the proposal.  After that, I will get into the concept of relevant factors and the six relevant factors that the DOL considers to be common to the evaluation of all investments for participant-directed plans. Then, in due course, I will discuss the scope and limits of the safe harbor.