PLANSPONSOR Webinar: Understanding the DOL’s Latest Proposal for Prudent Investment Selection

As the Department of Labor’s proposed rule on selecting designated investment alternatives continues toward the end of its 60-day comment period, plan sponsors may wonder how the proposal could change how they make their fiduciary decisions.

Panelists for PLANSPONSOR’s “Understanding the DOL’s Latest Proposal for Prudent Investment Selection” webinar on May 19 clarified their interpretation of the DOL’s objective for the proposal, when a final rule might be issued and what plan fiduciaries should consider as the rulemaking process continues.

Understandings and Misunderstandings

According to Brad Campbell, a partner in Faegre Drinker Biddle & Reath LLP and a former head of the Employee Benefits Security Administration under former President George W. Bush, the greatest misunderstanding about the rule is what it actually does.

“Even though [the rule] has ‘alternatives’ in the name and was borne of the president’s executive order on alternative assets, the actual alternative assets part of the rule is a really small portion [of it],” Campbell said. Rather, “it’s about defining the process by which you make investment decisions.”

The DOL proposal offers a safe harbor that could protect plan fiduciaries from litigation related to their duty of prudence under the Employee Retirement Income Security Act when selecting investments. The safe harbor is available to plan fiduciaries that follow “a prudent process” when selecting investments. The rule instructs fiduciaries to use a six-factor test to select their investments: performance, fees, liquidity, valuation, benchmarking and complexity.

Campbell said that most of the nearly 40,000 comments submitted to the DOL on the proposed rule as of May 19 were about alternative investments, despite the rule’s applicability to all investments.

“Your job as a fiduciary is not to be right about making investment decisions,” Campbell said. “It’s to prudently select investments that are appropriate for your plan. You’re judged whether you’re using the right or wrong process to make the decision.”

The rule is a “road map that doesn’t determine the destination for you,” added Jennifer Doss, a senior director and defined contribution practice leader at CAPTRUST. Plan sponsors can consider the six factors a “minimum” standard for evaluating whether an investment is prudent, and the rule leaves open the potential for more factors to be added based on future developments, Doss said.

Campbell added that if plan fiduciaries are already employing a “good fiduciary process,” they are probably already taking into consideration the six factors identified within the rule—sometimes implicitly, sometimes explicitly.

“What could be different [going forward] is the way that the evaluation of the factors is described or documented by investment consultants and plan fiduciaries,” Doss said.

Campbell agreed, adding that he believes the bulk of the documentation burden will fall on advisers, especially if plan sponsors do not have the in-house expertise to make prudent investment decisions. Meanwhile, plan sponsors with in-house expertise may be inclined to document considerations they had not given much thought to documenting in the past.

“Things done implicitly before will have to be explicit,” Cambell said. “[Plan sponsors] are going to want to actually lay out how [they] considered that [they] had the ability to understand the complexity of these investments.”

Learning From Specific Examples

Cambell said the most substantive concerns he has heard about the proposed rule are in the list of 20 hypothetical scenarios included in the proposal that offer scenarios of different fiduciary evaluations with varying considerations. He explained that the examples are written into the text—which, when final, will be legally binding as part of the Code of Federal Regulations—not into the preamble, which is introductory and explanatory.

“By putting the specific examples in the text, [DOL is] actually kind of codifying the specific examples [it chose],” Cambell said.

He said he anticipates many comments questioning whether the examples should be tweaked or were either too specific or too general, largely due to the unintended consequences of including them within the text. If a plan sponsor’s investment selection process looks very close to that of an example, the sponsor may feel compelled to mold it exactly into the example as a fiduciary safeguard, Cambell explained.

Doss added that the rule might cause some plan sponsors to turn inward and evaluate their understanding of complex investment topics, as well as the time they are devoting to understanding them. She added that such considerations could prompt plan sponsors to contemplate turning over their investment decisionmaking to a Section 3(38) investment fiduciary or joining a pooled employer plan.

Approximating the Timing

Campbell said a “good guess” is that the DOL will issue a final rule before year-end, but he added that is still only an approximation.

While the comment period on the proposed rule is scheduled to end on June 1, former DOL officials and several trade associations have requested a 30-day extension to the comment period, arguing that the current deadline does not provide enough time for stakeholders to review and respond to the approximately 150-page proposal. The DOL has not responded or announced an extension.

The DOL will need to read and possibly address the comments, Campbell explained. He added that many “substantive” comments are only just now starting to be filed. Once the comments are all considered, the DOL will need to write a final rule and a new economic analysis; submit the rule to the White House for review; and await comments from bodies such as the Securities and Exchange Commission and the Department of the Treasury, a process that could last about 90 days.

Whatever the exact timing, Campbell said he expects that by the first quarter of 2027, fiduciaries will “need to pay attention to this issue.”