For years, pension plan sponsors have operated in a gray area, with private investments allowed in fixed-date funds and managed accounts but rarely used. A new proposal from the Department of Labor attempts to reduce that uncertainty in 401(k) plans but, in doing so, raises its own questions.
The DOL’s proposed rule, released on March 30, addresses the inclusion of private equity investments, lifetime annuity plans, and cryptocurrencies in 401(k) plans. This rule clarifies that fiduciaries can include other investments in different vehicles, such as fixed-date funds, as long as they follow a written, prudent method and meet defined standards for diligence, benchmarking, liquidity, and comparisons of fees against similar investment funds. It also opens the door to include these other investments as independent options for participants.
Here are some details of the proposal, along with the new questions it raises:
Safe Harbor Approach
The proposed law includes legal protection for firms that follow clear procedures built around six factors that should be considered by plan managers when selecting investments for the plan. I am:
- Performance
- Fees
- Liquid
- Value for money
- Performance Benchmark
- Complexity
It is a logical framework for selecting investment options for defined contribution plans. It is assumed that people who have a belief in planning report that they consider every factor and act intelligently. If finalized in its current form, this bill could reduce the risk of litigation associated with involving more expensive, more complex investments. Cases, especially those related to fees, are increasing. In 2025, cases of excessive fees rose to 74 from 43 in 2024, according to Encore Fiduciary, a fiduciary credit insurance company.
We still have Questions
Each of the six factors is relatively straightforward when evaluating public market investments. Private markets complicate all six, not only because of their complexity but also because of the difficulties of monitoring performance, fees, capital and valuations. We have questions about how any of these factors will play out in practice, and we’ll explore them in future pieces. For now, we’re focusing on rates because rate exposure is often the first criteria lens design sponsors use when deciding whether to invest in their inventory.
Morningstar’s Jack Shannon highlighted how fee disclosure remains a problem for semiliquid funds that hold private equity. The growing number of mutual investment trusts in 401(k) plans adds another complication. Unlike mutual funds, CITs are regulated under Erisa and the DOL rather than the Investment Company Act of 1940 and the Securities and Exchange Commission, making an apples-to-apples comparison of fees challenging when those CITs involve private markets.
First, it is not clear whether CITs holding private market funds that charge a return fee, such as interest generated, will be required to include the cost in the total aggregate cost shown to participants. Second, mutual funds and exchange-traded funds must include interest costs in the prospectus and annual report cost estimates, which may be property costs for private credit, real estate and infrastructure funds; it is not yet clear whether CITs will be treated similarly. Third, it is still an open question how some of those costs will flow when the fund’s payments are made available.
Combined, these gaps make it difficult for plan providers to compare a reasonable set of similar investments and to evaluate whether the fees are fair, as required under the proposed fiduciary rule.
This information is also important for participants comparing investment options and deciding where to invest their retirement savings. History has shown that reducing costs is one of the few reliable ways to improve financial results.
A welcome improvement to the final rule would be clearer guidance on how complex private equity fee schedules should be disclosed to plan sponsors and participants.
Still a Long Road to Adoption
As we’ve discussed before, plan sponsors are often more concerned with minimizing the risk of legal action than choosing the best performing investments at any given time. The proposed rule opens the door for 401(k) plans to include private investments, but does not require sponsors to be involved. Because of how concerned many plan sponsors are about the risk of litigation, many will need to be cleared before they get involved. Although the proposed rule aims to provide clarity, the questions it raises about fees, liquidity, value, and complexity are significant. These are indeed areas where credibility is at greatest risk and where project proponents will need clear guidance before they can act with confidence.
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