Department of Labor Proposed Regulation Related to Alternative Investments

Article Key Takeaways

• The DOL has issued a proposed regulation clarifying how ERISA fiduciaries may evaluate investments in defined contribution retirement plans, including alternative investments.

• Although alternative investments have never been prohibited in defined contribution plans, many sponsors have avoided them due to regulatory, litigation, and investment risks.

• The proposed regulation introduces a fiduciary safe harbor that applies to all plan investments, not just alternatives.

• The safe harbor requires fiduciaries to evaluate investments using six factors: performance, fees, liquidity, valuation, performance benchmarks, and complexity.

• The DOL provided examples illustrating how these factors may be applied, including alternative investments.

Full Article

The Department of Labor (DOL) has issued a proposed regulation to provide guidance on the use of alternative investments in defined contribution retirement plans. The regulation is in response to an executive order issued in August 2025 that called for the DOL to “clarify the ERISA fiduciary duties owed to plan participants when plans offer asset allocation funds with investments in alternative assets.” Alternative investments include things like private equity, private credit, real estate, commodities, annuities, and cryptocurrency.

There has never been a law or rule preventing the use of alternative assets in defined contribution retirement plans. However, plan sponsors have not embraced these investments due to concerns about regulatory, litigation, and investment risks. The regulation seeks to address these concerns by providing a safe harbor for selecting any investment offered in a defined contribution retirement plan. The safe harbor would include investments in alternative investments, but would also apply to any investment offered in the plan.

The safe harbor requires consideration of six factors when evaluating an investment for inclusion in a plan. Each factor included examples of how it should be considered in evaluating an investment. The examples below are those the DOL highlighted as applicable to alternative investments.

1. Performance – Fiduciaries must review similar investment options to determine that the selected investment “furthers the purposes of the plan by enabling participants and beneficiaries to maximize risk-adjusted return on investment, net of those fees and expenses.” The example related to alternative assets suggests it may be prudent to select a lower-risk strategy with a lower-expected return by holding alternative assets with a low correlation to stocks and bonds in an effort to increase risk-adjusted returns.
2. Fees – The fiduciary must determine that the fees and expenses are appropriate, taking into account risk-adjusted expected return. The example indicates that “a strategy incorporating alternative assets, designed to further the purposes of the plan by decreasing volatility, and reducing the risk of large losses during a market downturn may justify a higher expense ratio.”
3. Liquidity – The fiduciary must determine that the investment is able to provide sufficient liquidity to meet liquidity demand at both the plan and individual level. For investments other than mutual funds, the fiduciary should receive a written representation from the investment provider that it has a liquidity risk management program similar to the Investment Company Act of 1940 requirements.
4. Valuation – The fiduciary must determine that the investment can be timely and accurately valued to meet the needs of the plan. The example cited indicated that for securities that do not have a generally recognized market, the investment manager must show the securities are valued through a conflict-free, independent process.
5. Performance Benchmarks – Every investment must have a meaningful benchmark so the fiduciary can compare the risk-adjusted returns, net of fees, of the selected investment. A meaningful benchmark is described as “an investment, strategy, index or other comparator that has similar mandates, strategies, objectives, and risks as the selected investment.” As it relates to alternative assets, the DOL example indicated that a benchmark may include a composite that blends the performance of stock and bond indices with methodologies used by investment professionals for a private equity sleeve.
6. Complexity – Fiduciaries must review the investment's complexity and determine if they have the skills, knowledge, experience, and capacity to understand the investment sufficiently to discharge their obligations under ERISA or if they require assistance from a third party in evaluating the investments.

Several investment companies are launching products featuring alternative investments, and the safe harbor may encourage plan sponsors to consider them. However, it is unclear whether sponsors want to address the six-factor requirement or whether investment companies can help them meet these criteria to include their products in a plan's lineup.

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.