TruePlan’s take on the DOL’s proposed rule for alt investments in DC plans

How the Department of Labor’s proposed rule impacts alternative investments in defined contribution plans

In late March, DOL released its long anticipated proposed rule addressing fiduciary duties in selecting designated investment alternatives for participant‑directed defined contribution plans, including those that may contain alternative investments. The proposal follows an executive directive from last year and seeks to provide a safe harbor for plan fiduciaries to meet ERISA’s duty of prudence when evaluating investment options, including those that fall outside of traditional public markets.

Industry reactions to the proposed rule have run the gamut. Below is a summary of what is proposed, what the industry is saying and our initial reaction.

The proposed rule: Fiduciary duties in selecting designated investment alternatives

The proposed rule clarifies ERISA’s duty of prudence as it applies to the selection of investment options in participant‑directed retirement plans. Importantly, DOL frames the proposal as asset‑neutral. It does not endorse or prohibit alternative investments. Nor does it require plan sponsors to add them.

Instead, the proposal introduces a process‑based framework under which fiduciaries who objectively, thoroughly and analytically evaluate investments across several identified criteria may be entitled to a presumption that their decision‑making process was prudent. Those criteria include expected performance, fees, liquidity, valuation, benchmarking and complexity. The message from DOL is clear: ERISA has always been about process. This proposal is meant to reinforce that standard.

The rule specifically acknowledges that this framework, in addition to its application to standalone options, applies to professionally managed vehicles, such as asset allocation funds and target date funds, which may include alternative assets as a component.

The proposal is now subject to a 60‑day public comment period ending June 1, after which the DOL may revise, finalize or further defer action.

Pragmatic optimism

One end of the industry response has been decidedly positive. From this perspective, the proposed rule is seen as a laissez‑faire, principles‑based approach that embraces asset neutrality and aligns with longstanding institutional investment practices. Supporters argue that alternative investments — when used thoughtfully — can improve diversification, reduce reliance on traditional public securities and potentially enhance long‑term risk‑adjusted returns.

In this view, the retirement industry has spent years overcorrecting for litigation fears and regulatory ambiguity, effectively freezing defined contribution plans in an antiquated investment model while capital markets have evolved around them. Proponents see the proposed rule as a long overdue acknowledgment that process matters more than product, and that fiduciaries should not be second‑guessed simply because an investment does not fit neatly into daily‑priced, easily benchmarked boxes.

There is also a belief among supporters that the rule’s explicit focus on structure, e.g., valuation discipline, liquidity management and operational complexity, actually mitigates many of the risks critics point to. In other words, the solution to complexity is not prohibition, but governance.

This camp often draws parallels to earlier waves of innovation in the defined contribution space. Target‑date funds, collective investment trusts and white label investment structures all faced skepticism early on. Over time, with improved design and oversight, they became mainstream. From this vantage point, alternative investments may simply be on a similar trajectory.

Deep skepticism and distrust

At the opposite end of the spectrum is a strong negative reaction, one rooted less in technical fiduciary analysis and more in structural distrust.

Critics argue that most alternative investments do not belong in participant‑directed plans at all, regardless of process. They point to limited liquidity, opaque valuation, higher fees and complex risk characteristics as fundamentally incompatible with daily valued accounts designed for individual investors who may change jobs, rebalance frequently or react emotionally to market stress.

There is also a more pointed criticism underlying much of this reaction: that defined contribution (DC) plans represent the “next stop” for private capital precisely because other avenues, e.g., institutional allocations, endowments, etc., are becoming saturated or less accommodating. In this framing, the push toward DC plans is not about participant outcomes, but about asset gathering.

A related concern is that risk is being pushed downstream, from sophisticated institutions to individual workers and from professional allocators to volunteer retirement plan committees. Even if the rule emphasizes process, skeptics question whether most plan sponsors truly have the resources, expertise or appetite to underwrite private investments, let alone explain them to participants in a meaningful way.

To this camp, the proposed rule is not benign clarification — it is a policy signal that may embolden product development faster than fiduciary readiness can keep pace.

TruePlan’s initial reaction

At TruePlan, we understand both narratives — and find elements of truth in each. It is accurate to say that ERISA was never meant to fossilize investment menus. It is also accurate that diversification, when properly implemented, can be a powerful contributor to long‑term outcomes. As our clients can attest, we agree that fiduciary prudence is rooted in a strong process, and we like that the proposed rule reinforces it.

At the same time, it would be naïve to ignore the structural mismatch between many alternative investment characteristics and the realities of participant‑directed plans, as noted our 401(k) private capital commentary published on the eve of this proposed rule. Daily liquidity, frequent trading, behavioral biases, job turnover and limited financial literacy are not rare in the DC world, they are the norm.

The new rule may be welcomed if it can truly provide protection to process-embracing fiduciaries against recent waves of frivolous lawsuits hitting the industry. However, we remain skeptical about the degree to which certain alternative investments will actually find a home in defined contribution plans and whether a significant number of plan sponsors will see a meaningful opportunity in this complex category on behalf of their participants. Some questions include:

1. Is all this effort worth it, and will the potential performance and diversification benefits be meaningful?

At this stage, it remains unsettled whether the potential performance and diversification benefits will be meaningful. The ultimate value proposition for retirement savers remains uncertain.

2. Will these investments resonate with the average investor?

Target‑date funds ultimately succeeded not because they were sophisticated, but because they solved a behavioral problem simply and intuitively. Participants did not need to understand glide paths, asset classes or rebalancing. They just needed to select a year. Alternative investments, even when embedded inside managed products, do not obviously offer the same behavioral compatibility. Additional questions include:

• Will participants understand what they own?

• Will they want to remain invested during periods of relative underperformance or illiquidity?
• Will complexity erode confidence rather than enhance outcomes?
  
  

3. Will plan sponsors really want to take this on, particularly small- and mid-sized plans who have less resources?

Even with a process‑based safe harbor, fiduciary decisions involving alternatives demand more governance, documentation and expertise. As seen in litigation, many plan sponsors already struggle with strong governance.

4. Will limited volatility truly enter the 401(k) ecosystem?

One claim (sometimes) made about alternatives is that they can provide “smoother” return profiles due to appraisal‑based valuation or structural design. That may be true in some cases, but will participants who are currently in transparent, daily valued plan investments ever embrace the opaque and illiquid nature of many alternative investments?

Our initial conclusion: Cautious, curious and skeptical

While we embrace a clear process, fiduciary safe harbors and a strategic use of alternative investments in other account types, we are initially skeptical that this rule will materially change the defined contribution landscape in a way that improves outcomes for the average participant.

Outside of a potential increase of alternative investments within professionally managed asset allocation funds, we expect more discussion than adoption. And a continuation of more product development than sponsor demand. And of course, more headlines than implementation at least in the near-to-medium term.

That does not mean the proposed rule lacks value. Clarifying fiduciary standards is helpful. Encouraging better process is always worthwhile. But clarity alone does not create suitability, and innovation alone does not create readiness for retirement plans.

What’s next? Monitoring developments closely and sharing further perspectives

This blog post reflects only our initial reaction. For plan sponsors who want to go deeper, we encourage you to read TruePlan’s recent blog post Private capital in 401(k)s: What plan sponsors should know. That piece focuses less on regulatory theory and more on the real‑world questions fiduciaries should be asking before engaging with complex new investment structures.

The proposal is subject to a 60‑day comment period and we expect continued dialogue, refinement and debate as the industry digests its implications. In the meantime, we will continue to monitor developments closely and share further perspectives as the rulemaking process unfolds.