Fitting Alternative Assets with ERISA DC Plans: More Takeaways from DOL’s Proposed 401(k) DIA Selection Rule

The US Department of Labor’s proposed rule on Fiduciary Duties in Selecting Designated Investment Alternatives would establish a new process-based safe harbor for fiduciaries selecting 401(k) investment options.

As covered in our April 2026 LawFlash, the DOL issued a proposed rule in March 2026 (the Proposed Rule) that addresses fiduciary decision-making in selecting ERISA-covered defined contribution (DC) plan investment options. This LawFlash is a continuation of and assumes familiarity with that LawFlash (which summarized the Proposed Rule’s overall framework and initial considerations for plan fiduciaries and other stakeholders).

The Proposed Rule would establish a new “process-based” safe harbor (the Safe Harbor) for the selection of designated investment alternatives (DIAs). While rooted in an executive order on Democratizing Access to Alternative Assets for 401(k) Investors, the proposal addresses more than just “alternatives” and applies to all types of DC plan DIAs.

This LawFlash is a follow-up to our LawFlash identifying five considerations and questions that can be drawn from the Proposed Rule as well as the 20 detailed Examples. This LawFlash will focus on four additional themes and questions presented by the Proposed Rule and its Examples.

The four considerations covered below may be particularly relevant for the scope and application of the Safe Harbor in DC plans, including for investments in private funds and other nonregistered products, which may warrant comment to the Department during the comment period, but also may present material considerations after the comment period ends for the ongoing offering and development of alternative assets for ERISA DC plans. As previously covered, comments on the rule are due on June 1, 2026.

CERTAIN INVESTMENT OPTIONS MORE DIRECTLY ADDRESSED BY THE PROPOSAL THAN OTHERS

A notable feature of the Proposed Rule is which DIAs it speaks to directly and which it addresses more indirectly.

For example, the Proposed Rule applies to the selection of DIAs, which includes a qualified default investment alternative, or QDIA (i.e., an investment used for participants who do not make an affirmative election), and uses a DIA definition that differs in certain respects from the definition in the Department’s participant-level disclosure regulations under 29 CFR § 2550.404a-5.

Managed account services fall within the Safe Harbor only when they are offered as a QDIA, which may not be how all (or even most) managed account offerings are structured. Investment options that are available only through managed account or investment advice programs are also outside the Safe Harbor unless those same options are separately offered as DIAs in the plan’s core lineup.

This is a notable limitation as many proposals for private-market exposure in DC plans would introduce that exposure through managed account and investment advice programs rather than as standalone 401(k) menu options.

For example, according to the Preamble the definition of DIA in the Proposed Rule would extend to managed account services only to the extent they are offered as QDIAs. In this respect, the term DIA in the proposal has broader scope than in the Department’s 404a-5 regulation, which does not include an investment management service as a DIA subject to the regulation’s investment-related disclosure requirements (although certain other disclosure obligations would apply).

In making this distinction, the Department noted that the narrower scope of the definition in the participant-level disclosure regulation relates to the practicality of making the investment-related disclosures with respect to a managed account service as opposed to a determination that managed account services should be distinct for all purposes. Given the prevalence of QDIAs in participant-directed individual account plans, extending the fiduciary Safe Harbor in the proposal to all types of QDIAs, including managed account services, is particularly important.

The definition of DIA under the Proposed Rule does not include self‑directed brokerage windows.

THE LIQUIDITY EXAMPLES

Liquidity Examples Point to Liquidity Risk Management Programs for Registered Funds Raising Implications for DIAs That Are Not Mutual Funds

The liquidity factor in the Safe Harbor, which requires consideration of whether the investment has sufficient liquidity for both the plan and participants, raises a number of questions, particularly for products that are not registered funds.

The liquidity Examples borrow legal standards from the federal securities laws, specifically the Investment Company Act of 1940’s liquidity risk management rule Rule 22e-4.

For instance, Example 1 addresses participant-level liquidity requirements arising from withdrawals due to retirement, separation from service, hardship or reallocating amounts to other DIAs. Example 3 addresses plan-level events that may require large withdrawals when the plan has DIAs invested in illiquid assets.

Both Examples treat the registered fund liquidity risk management programs that open-end management investment companies registered with the SEC under the Investment Company Act are required to adopt as an important data point that can help support a conclusion that the liquidity factor is satisfied in comparable circumstances.

In both of these Examples, a plan fiduciary could require the manager of a non-mutual fund DIA to contractually agree to maintain liquidity risk management programs that are substantially similar to those required of registered open-end funds (for example, mutual funds and ETFs).

The Proposed Rule’s reliance on registered open-end fund liquidity risk management programs is puzzling in some ways, and perhaps too simple. For example, within the registered fund universe, closed-end funds (including interval funds, which are more likely to hold alternative or less liquid assets) are subject to liquidity requirements that differ from, rather than mirror, the Rule 22e-4 liquidity risk management program for open-end mutual funds. Further, the liquidity risk management programs required of open-end funds are complex and would take substantial work for nonregistered funds to implement.

In addition to limiting illiquid assets to 15% of the fund’s portfolio, Rule 22e-4 also requires each asset to be classified as highly liquid, moderately liquid, less liquid, or illiquid, and requires the fund to determine a minimum amount of highly liquid assets appropriate for that fund. The rule also requires a formal liquidity risk management program subject to board approval and oversight by the fund’s board of directors. Further, a range of practices have developed in the market in response to Rule 22e-4.

The Proposed Rule does not offer details as to the DOL’s expectations for how these various elements of a liquidity risk management program would be applied to an alternative asset vehicle or a CIT. Such an approach may work for strategies that will never allocate more than 15% to illiquid investments, but it would require new policies and programs that will not be well understood by many fund managers, and in particular those that do not already offer registered fund products.

Example 4 addresses a DIA that is a pooled investment managed by a third party and assumes that the product’s redemption features are aligned with the redemption rights of the plans invested in the product, rather than giving the manager of the product broad discretion to suspend or gate redemptions.

Example 4 also requires representations from the manager regarding its liquidity practices and, in so doing, cross-references Rule 22e-4, which requires registered open-end funds to maintain a liquidity risk management program to meet shareholder redemptions under normal and reasonably foreseeable stressed conditions. For private funds and other nonregistered vehicles, that reference underscores the tension between the Safe Harbor’s expectations and structures that retain a broad ability to suspend or limit redemptions when liquidity is tight.

Seeing as these examples reference specific liquidity requirements, they are relevant not only for nonregistered alternative funds but also certain more traditional CIT-based strategies. In particular, stable value funds offered through bank-maintained CITs can hold illiquid assets such as wrap contracts and private placements even though they are designed to provide book-value liquidity to participants.

There are no registered stable value mutual funds and in prior discussions the SEC has not supported registered stable value mutual funds being offered, thus these strategies almost by definition sit outside the registered fund framework that underlies many of the liquidity Examples. Those features raise similar questions about how the Safe Harbor would apply to products that promise participant-level stability or liquidity but rely on underlying exposures that are not themselves fully liquid.

On the other hand, the Proposed Rule makes clear that there can be prudent investments that do not offer daily liquidity. That recognition is important for structures that cannot be fully liquid, but still leaves open the question of how such investments can be offered in a form that fiduciaries can evaluate and monitor.

In practice, the primary way plan fiduciaries are likely to implement this is by using sleeves inside a single DIA (for example, target date funds, balanced funds, or sector-specific CITs whose portfolios include both illiquid and liquid assets even though the DIA is offered as one fund on the plan menu). In that structure the illiquid exposure is held in a sleeve of a broader diversified fund, and the fiduciary evaluates liquidity at the DIA level rather than treating the illiquid asset as a standalone option.

For private funds and other nonregistered structures, the practical implication is that those illiquid sleeves may need to be delivered through vehicles such as CITs or other multistrategy products that include alternative sleeves, together with agreed notice periods or secondary transfer arrangements, to support a liquidity framework that fiduciaries can defend under the Safe Harbor.

VALUATION AND IMPLICATIONS FOR PRODUCTS WITH STRICT VALUATION REQUIREMENTS

The valuation factor in the Safe Harbor similarly requires the fiduciary to determine that the DIA has adopted adequate measures to ensure that it can be timely and accurately valued, which raises particular issues for assets that are inherently difficult to value or not otherwise required to be valued daily.

As with the liquidity Examples, the valuation Examples assume frameworks that are built around registered open-end funds, and they therefore have particular significance for nonregistered alternative funds and broader asset allocation or CIT strategies that hold illiquid assets.

For instance:

• Example 1 involves a DIA that is an open-end management investment company registered with the SEC under the Investment Company Act and all of the DIA’s underlying investments trade daily on a public exchange.
• Example 2 involves a DIA that holds securities for which there is not a generally recognized market, where the manager of the DIA represents that those securities are valued in accordance with Financial Accounting Standards Board Accounting Standards (ASC) Codification 820 (Fair Value Measurements). That framework is already widely used by many CITs and other institutional products, but it may be a more significant ask for private funds or other vehicles that have historically relied on less formal valuation practices.
• Example 3 also involves a DIA that is a mutual fund, but one with some securities that trade daily on a public exchange and some securities for which there is not a generally recognized market. In this example, the relevant standards are the SEC’s rules for registered open-end funds, in particular Form N-1A (the SEC’s registration form for open-end funds). The fund’s adviser represents that the fund’s valuation program applies that registered fund disclosure and valuation framework even to portfolio securities that do not trade on a public exchange. This highlights that the Department’s baseline for valuation and disclosure is a mutual fund standard, even where the underlying assets are not fully exchange-traded and even though many nonregistered products would not otherwise be subject to that framework.

A key question raised by the valuation Examples is how the Safe Harbor will apply to assets that are not publicly traded or otherwise required to have daily valuation. How will such assets be deemed to satisfy the valuation Safe Harbor?

The Examples are at least helpful in suggesting that, in some cases, a written representation from the manager that its valuation program is “substantially similar” to the Investment Company Act requirements may suffice, even where the product itself is not a registered fund. For private funds, CITs, and other nonregistered vehicles, that framing puts particular weight on how far their internal valuation programs can credibly track mutual fund–style standards.

Example 4 is a continuation fund scenario in which a mutual fund that has recently acquired or is about to acquire alternative assets managed or controlled by the manager of the fund or an affiliate of the manager (the continuation fund) holds assets that do not trade on a public exchange and lack readily observable market prices. In that example, the Department describes the arrangement as failing both the Safe Harbor and the Section 404 prudence standard, underscoring the particular scrutiny it appears to apply where affiliated transactions and hard-to-value assets intersect.

At a minimum, one could read Example 4 as implying that—in higher-conflict settings of this kind—a conflict-managed independent valuation process is essentially nonnegotiable for purposes of the Safe Harbor, and the manager’s role in setting values may need to be limited to providing data and judgments to an independent valuation agent or consultant rather than controlling the ultimate marks.

ASSET-NEUTRAL, BUT CHALLENGING FOR NONREGISTERED STRUCTURES

The Department describes the proposal as asset‑neutral, purposefully extending beyond “alternatives” as defined in the executive order and affecting all DIAs. But many of the Safe Harbor requirements and examples assume structural characteristics or compliance requirements that are used for funds that are registered under the Investment Company Act (i.e., mutual funds). Other investment structures that are not registered with the SEC, such as CITs, do not currently have the same compliance requirements and, at least in some cases, may not as easily satisfy those assumptions.

For nonregistered funds this would require additional compliance, which could be burdensome and in any event is not otherwise required for those funds. These themes recur in particular around liquidity and valuation, which as currently proposed may be especially challenging for private funds and other nonregistered vehicles. For instance, CITs are not subject to the same liquidity and valuation requirements as the mutual funds used in several of the Examples. This raises a question about how workable the Safe Harbor will be for products that are not required to follow mutual fund–type liquidity and valuation frameworks.

In practice, one way nonregistered products could seek to fit within those assumptions would be through contractual undertakings and representations designed to approximate key mutual fund features, particularly with respect to liquidity and valuation—but it is not yet clear how practical or common that approach will be across different product types.

REFERENCES TO INVESTMENT COMPANY ACT AND SEC FRAMEWORKS RAISE ALIGNMENT QUESTIONS FOR NONREGISTERED PRODUCTS

As discussed, a number of the liquidity and valuation Examples are built around reference to regimes that apply to registered mutual funds, including Rule 22e-4, Form N-1A, and ASC 820.

For registered funds, those references largely confirm that existing liquidity risk management, disclosure, and valuation frameworks can help satisfy the Safe Harbor’s liquidity and valuation factors. For CITs, private funds, and other nonregistered products, however, those same references raise a different question: how closely must a product that is not itself subject to the Investment Company Act track that regime in order to fit within the Safe Harbor as proposed?

That question is especially important since the Proposed Rule appears to use these registered fund frameworks not merely as background context but as practical benchmarks for what a prudent liquidity or valuation process looks like, and this creates a potential tension in the Proposed Rule. While the Proposal is expressly asset-neutral and not limited to registered funds, its examples may tilt toward products already designed around mutual fund regulatory architecture.

In the liquidity context, for example, it is unclear whether a program that is “substantially similar” to Rule 22e-4 would need to replicate specific features of that rule, including its treatment of illiquid investments, or whether the Department instead intends those references to be illustrative rather than prescriptive.

The same issue arises on the valuation side. As discussed, the valuation Examples suggest that conflict-managed independent valuation processes aligned with ADC 820 may be central to satisfying the Safe Harbor where hard-to-value assets are involved. That may be less significant for certain CITs and other institutional products that already use ASC 820–based processes, but it may be more consequential for private funds and other nonregistered vehicles that are not otherwise organized around registered fund-style valuation and disclosure regimes.

In light of this, one focus for comments may be to ask the Department for clarity regarding its references to the Investment Company Act and SEC frameworks: are they intended to identify relevant models for fiduciaries to consider or are the substantive requirements of the regimes to be imported wholesale into all DIAs? Such clarification would better align the Safe Harbor’s stated asset-neutrality with the reality that nonregistered products may address liquidity and valuation prudently through different, though still robust, operational arrangements.

LOOKING AHEAD

The Proposed Rule does not by itself resolve all of the structural questions that private funds and other nonregistered products face in DC plans. It does, however, offer a clearer framework for fiduciaries’ prudent process and highlights where the operational features of these products (particularly liquidity, valuation, benchmarking, fees, and complexity) may have to evolve.

For managers and sponsors, the near-term focus is likely to be both on vehicles such as target date funds, balanced funds, and CITs and other delivery structures that can satisfy the Safe Harbor’s expectations, and on targeted comments aimed at ensuring that the final rule can be applied to nonregistered structures on workable terms.