Article Key Takeaways

• The DOL’s proposed investment selection rule applies to all retirement plan investments—not just alternatives.
  While prompted by alternatives, the framework governs fiduciary decision-making across asset classes.
• Fiduciaries must evaluate six core factors: performance, fees, liquidity, valuation, benchmarks, and complexity.
  The rule emphasizes a prudent, well-documented process rather than prescribed outcomes.
• Lower cost is not always required—but higher fees must be justified.
  Features such as lifetime income, diversification, or risk management may support higher expenses, while failure to select identical lower-cost share classes is imprudent.
• Illiquid or complex investments require heightened scrutiny.
  Fiduciaries are expected to understand liquidity constraints, valuation methods, and conflicts of interest, often with help from qualified investment professionals.
• Benchmarks must be meaningful and aligned with the investment’s structure.
  Oversimplified or mismatched benchmarks may fail the DOL’s expectations for prudent monitoring.

Full Article

A lot of focus on the DOL’s proposed rule for retirement plan investment selection has been on its application to alternative investments. While the rule was issued in response to an executive order on alternatives, the DOL also provided an investment selection process that would apply to all plan investments. The rule has six factors for consideration when selecting a plan investment:

• Performance
• Fees
• Liquidity
• Valuation
• Performance benchmarks
• Complexity

The DOL provided 20 examples to help plan sponsors understand how these factors could be applied. Many articles focused on alternatives (see my previous blog on this topic). However, because this regulation applies to all investments, here is a synopsis of the twenty examples.

Performance:

• A strategy utilizing alternative investments with low correlations to stocks and bonds may be appropriate if the expectation is improved risk-adjusted returns.
• Giving greater weight to long-term performance over short-term performance due to the long-term time horizon for retirement savings.

Fees:

• Plan sponsors do not always have to pick the investment with the lowest fees and expenses. In evaluating a more expensive option, a fiduciary should rely on the investment value proposition relative to cost in their determination.
• An investment with a lifetime income feature may justify a higher fee than one without that feature.
• An investment with alternative assets seeking to decrease volatility and reduce the risk of loss during general market downturns may justify a higher expense.
• It is imprudent not to select an available lower-cost share class where both share classes are identical.
• A plan may offer both active and passive investments in an effort to increase diversification, provided the benefits justify the potential higher expense of actively managed investments.

Liquidity:

• Reliance on the investment managers’ registration and compliance with the Investment Company Act of 1940 (covering most open-end mutual funds).
• For non-registered mutual funds, the named fiduciary may rely on a written representation from the investment manager that it has adopted a liquidity management program substantially similar to that required by the Investment Company Act of 1940.
• For a deferred annuity contract, the fiduciary should balance the liquidity restrictions with the guarantee offered by the annuity contract and conclude the value of guaranteed monthly payments justifies the liquidity rules.
• For pooled funds that hold illiquid positions, the fiduciary should evaluate and understand, with the assistance of an investment advice fiduciary,
  • The maximum allocation to illiquid assets
  • The timing for the sale of such assets
  • The timing for potential sale of assets without reducing their value
  • When the investment will return the initial capital
  • Scope and duration of the investment’s restrictions on the plan
  • Plan’s potential need for liquidity
• For investments not registered under the Investment Company Act of 1940, obtaining a written notice that the investment has adopted a liquidity risk management program substantially similar to the requirements of the Investment Company Act of 1940.

Valuation:

• Valuations derived from a national securities exchange when all underlying investments trade daily on a public exchange (i.e., stocks and bonds).
• For securities that lack a recognized market, fiduciaries should obtain written representation that the securities are valued through a ‘conflict-free, independent process no less frequently than quarterly.’
• For open-end mutual funds, for securities that lack a generally recognized market, reliance on the fund’s financial statements and valuation-related disclosures, including the fund’s prospectus disclosures.
• One example that would not meet the safe harbor included an investment that was allowed to hold non-public investments, selected from an investment vehicle managed by an affiliate. This example lacks clarity about a conflict-free, independent process.

Performance Benchmarks:

• For target date funds, a ‘meaningful benchmark’ would not include an index tracking only large cap US equities when benchmarks with more similarities are available.
• For an investment with stocks, bonds, and a private equity sleeve, a ‘meaningful benchmark’ could be a composite of traditional stock and bond indices and methodologies commonly used by investment professionals for the private equity sleeve.

Complexity:

• For a private asset, the fiduciary should consider the investment's complexity and determine whether it has the skill to discharge its obligations under ERISA; if not, it should seek assistance from a “qualified investment advice fiduciary, investment manager, or other individual.”
• For a managed account, an example would not meet the safe harbor if the fiduciary fails to understand the design of the managed account and determines that results, when compared to a target date option, are sufficient to justify the added expense.

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.