The DOL Safe Harbor Covers Process. It Doesn't Cover Conflicts.

Article Key Takeaways

• The Department of Labor's proposed safe harbor for defined contribution plans provides a framework for demonstrating fiduciary prudence when evaluating private equity, private credit, real estate, and other alternative investments.

• The proposed rule addresses the ERISA duty of prudence but does not address the fiduciary duty of loyalty, prohibited transaction rules, or ongoing investment monitoring.

• A well-documented investment process can help defend investment decisions, but it does not eliminate concerns about conflicts of interest.

• Plan sponsors should evaluate not only whether an alternative investment is prudent, but also whether advisors, consultants, recordkeepers, or affiliates may benefit from the recommendation.

• Fiduciary committees considering private market investments in 401(k) plans should conduct conflict-of-interest due diligence and document advisor relationships, compensation structures, and ownership interests.

• Before evaluating alternative investments, sponsors should ask who benefits from the process itself, not just whether the investment meets prudence standards.

Full Article

For the first time in years, plan sponsors are hearing a consistent message from Washington, D.C. about alternative investments in defined contribution plans: follow a sound process, document it well, and you should be able to defend your decision.

The Department of Labor’s (DOL) proposed rule on selecting designated investment alternatives, published in March, lays out a process-based safe harbor for fiduciaries evaluating investment options, including private equity, private credit, real estate and other alternatives. On October 6, the Supreme Court heard arguments in Anderson v. Intel, a case about alternatives in a 401(k) plan and what participants must show to challenge them. Wherever the Court lands, the direction is clear. Fiduciaries will be judged on how they decided, not on how the investment turned out.

Expect to hear a version of that message from providers soon, usually offered as reassurance: follow the steps, build the file, and alternatives become defensible.

That’s partly right. But ERISA imposes two core duties on fiduciaries, and the safe harbor addresses only one of them.

What the Proposal Does

The proposed rule would provide fiduciaries a structured way to demonstrate prudence when selecting investment options for a participant-directed plan. It lists factors to weigh: performance, fees, liquidity, valuation, performance benchmarks, and complexity. It also says there should be no presumption against new or innovative designs. Consider the factors carefully, document the analysis, and a fiduciary has a strong argument that it met the duty of prudence.

The proposal also refers repeatedly to investment advisers. It doesn’t require sponsors to hire one. Still, many readers have reasonably taken those references as a signal that the DOL sees expert help as part of a prudent process, especially for complex products.

None of this is unreasonable. Process has always been at the heart of ERISA prudence, and clearer guidance helps sponsors. The issue is what the proposal leaves out.

What it Doesn’t Cover

The safe harbor is about prudence: whether a fiduciary acted with the care, skill, and diligence of a knowledgeable person. It does not address the duty of loyalty, the obligation to act solely in the interest of participants. It does not address the prohibited transaction rules. And it does not address ongoing monitoring, which the DOL has said it expects to take up separately.

Put simply, the rule speaks to how carefully you made your decision. It is silent on who benefits from the decision.

That distinction matters because a process can be and frequently may be careful and conflicted at the same time. A committee can work through every factor, review a thorough memo, and record a thoughtful discussion, and still have been steered by someone with a stake in the answer. Prudence and loyalty are separate duties. Satisfying one doesn’t satisfy the other.

The Advisor is the Process

Where does a committee’s process actually come from? For most committees, the analysis in the file comes from the advisor or consultant: the manager due diligence, the liquidity and valuation review, the fee comparison, and the benchmark recommendation. The committee deliberates, but the advisor frames the options, the evidence, and often the recommendation.

A process-based safe harbor makes that work more valuable as a defense. It also makes the work more consequential if the advice is or could be viewed to be compromised.

Meanwhile, the structure of the advice market has shifted in ways that matter here:

• Advisory has consolidated. Much of the retirement plan advisory industry has been rolled up over the past decade, often with private equity capital behind it.
• Recordkeepers have become platforms. Many now distribute managed accounts, advice programs, and proprietary or partnered products.
• Product is being built for DC. Asset managers are packaging private-market sleeves into collective trusts and target-date series designed for defined contribution plans.
• Private markets need new capital. With slower exits and longer holding periods, private markets firms have strong reasons to want access to DC assets.

None of this means any particular advisor is acting in bad faith. It does mean that the parties most eager for DC money to flow into private markets are, more and more often, economically connected to the parties advising committees on whether it should. That’s a structural question, and sponsors should ask it directly rather than assume it away.

The Paper-trail Problem

Here is the counterintuitive part: a well-documented process built by a conflicted advisor may leave a sponsor more exposed, not less.

Consider what the file would show. The committee relied on analysis and recommendations from a party whose parent, affiliate, or owner had an economic interest in the outcome. That is exactly the fact pattern a loyalty claim or a prohibited transaction claim needs. The safe harbor documentation doesn’t rebut it. It establishes it.

“We followed every factor in the rule,” answers the question, “Was your process prudent?” It does not answer “Whose interests did your process serve?”

Five Questions to Ask First

Before the alternatives conversation starts, ask your advisor these questions, and record the answers in the committee minutes. Ask them about any advisor, independent ones included.

1. Who owns your firm, and does your owner have economic interests in private markets? Look past the advisory entity to its parent and that parent’s investors.
2. Do you or any affiliate receive compensation tied to the investments you might recommend? That includes revenue sharing, platform fees, model or collective trust fees, sub-advisory fees, and placement fees.
3. Will you accept fiduciary status in writing for this recommendation? Whether the role is 3(21) or 3(38), confirm it in the contract, and for this specific advice rather than just in general.
4. What relationships do you have with our recordkeeper? Look for distribution agreements, platform arrangements, referral arrangements and shared ownership.
5. How and when will you tell us if any of these answers change? Ownership turns over quickly in this industry, so disclosure should be ongoing, not one-time.

Clean answers don’t guarantee good advice. Answers that raise concerns don’t automatically disqualify an advisor either, but those concerns should be evaluated, managed, and documented. Asking the questions and recording the answers is itself part of a prudent process. It’s the part that the safe harbor doesn’t do for you.

The Question Before the Question

The proposed rule may well make alternatives easier to defend on prudence grounds. It won’t make conflicts easier to defend, and it doesn’t claim to.

Before your committee asks whether a private-markets option is prudent, ask an earlier question: whose interests is the process serving? If you can’t answer that with confidence, the safe harbor won’t answer it for you.

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.