Key Takeaways

• The DOL’s proposed rule reshapes how fiduciaries evaluate all retirement plan investments, emphasizing a documented, process‑driven approach—not just alternative assets.

• The six‑factor “safe harbor” offers limited protection, not certainty. Compliance creates a presumption of fiduciary prudence, but courts are not required to defer to the DOL’s position.

• Even without alternative investments, plan sponsors may need to revisit investment selection practices and governance documents to align with the new framework.

Full Article

The Department of Labor (DOL) has issued a proposed regulation focusing on the fiduciary responsibilities involved in selecting investments for defined contribution retirement plans. The regulation was issued in response to an August executive order that focused on broader access to alternative assets in retirement plans, but it would apply to the selection of any retirement plan investment. A prior blog post focused on the six-factor safe harbor described in the regulation (link). There are positives for plan sponsors, as this approach directs them to process-driven factors to consider when assessing plan investments.

As we review the proposed rule, here are three initial thoughts on its impact:

Is it really a safe harbor?

Not really. The proposed regulation suggests a six-factor test as a ‘safe harbor.’ It is critical to understand what that means when issued through a Federal regulatory agency. The DOL fact sheet for the rule states that a plan fiduciary who has followed the process “is presumed to have met the fiduciary’s duties under section 404(a)(1)(B) of ERISA.” So, the term ‘safe harbor’ is a bit of a misnomer. A true safe harbor means ‘if I followed safe harbor requirements and can prove I did so, I receive the full protection afforded by the safe harbor”. The safe harbor here is less certain, more like, “if I can prove I did these things, I have the support of the DOL and a judge should give deference to the DOL opinion that I have met my fiduciary duty”. Interestingly, the degree to which the judiciary must rely on a federal agency’s opinion was reduced under the 2024 Loper Bright Supreme Court decision, which ended the so-called Chevron doctrine. That ruling allows the courts to consider federal agency rules and opinions, but no longer requires maximum deference to those positions. Once challenged, the DOL may be required to justify its position in court.

Showing adherence to the six factors may be difficult

If a court does accept the notion that complying with these six factors justifies a safe harbor, plan sponsors still must show adherence to the process outlined in the regulation. That may be a high bar, especially as it relates to alternative assets. The regulation has several references to the Investment Company Act of 1940, the law that governs most mutual funds, the most common investment vehicle found in defined contribution retirement plans. For investments not covered by the ’40 Act, the proposed regulation references the Act as a good measure of compliance. In fact, three of the six (Liquidity, Valuation, and Performance Benchmarks) include specific examples referencing the ’40 Act for satisfying the factor. These three items in particular present some of the biggest challenges in offering alternative investments in daily valuation defined contribution plans. While these three pose the biggest challenges in a defined contribution setting, all six could be used as reasons to avoid alternative investments.

Impact on all plans, even those that do not intend to offer alternative investments

The proposed regulation applies to the selection of all designated investment options. Some plan sponsors may not be interested in offering access to alternative asset products, but should continue to monitor the proposed and expected final rules. While the ‘safe harbor’ may be squishy, it does provide a framework for all plans to evaluate and select retirement plan investments. Once final, plan sponsors and investment advisors will need to review their current selection parameters for some alignment with the regulations. In addition, plan governance documents (charter, investment policy statement) should be reviewed to determine if the six factors should be included.

Overall, the proposed regulation is helpful in providing direction for fiduciaries selecting plan investments. However, it is not a true safe harbor. Further, if it is accepted by a court as a safe harbor, showing compliance with the process may prove challenging.

 Multnomah Group is a registered investment adviser registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.