Capital Ideas^™ 
Investment insights from Capital Group

The U.S. Department of Labor’s (DOL) recently issued proposal on alternative investments in 401(k) plans addresses a broader issue — clarifying how plan sponsors should evaluate investment options offered in defined contribution (DC) plans. Much of the early coverage has framed the proposal as opening the door to alternatives in DC plans. In practice, the proposal is focused on the process fiduciaries use to select investment options: how fiduciary decisions are evaluated and judged in context, based on risk-adjusted outcomes rather than outcome-driven metrics.

In doing so, the proposal challenges several longstanding assumptions — including the idea that fiduciary prudence requires selecting the lowest-cost option, or that index strategies are inherently less risky than actively managed approaches. Instead, the proposal reinforces a durable principle: plan sponsors may prudently offer a wide range of investment options when decisions are grounded in a disciplined process and evaluated in light of risk, return, fees, and plan objectives.

The DOL is explicit about the role litigation has played in shaping fiduciary behavior. In the proposal’s preamble, the Department emphasizes that the Employee Retirement Income Security Act (ERISA) grants discretion to fiduciaries — “not opportunistic trial lawyers” — to determine whether investment options appropriately serve plan objectives. Taken together, the proposal seeks to influence how fiduciary decisions are assessed in litigation, narrowing the gap between ERISA’s process-based standard and the hindsight-driven theories most often advanced in court. It underscores that fiduciary prudence should be assessed over an appropriate time horizon and market context, rather than inferred from short-term results or isolated performance periods.

A principles-based, asset-neutral framework

The proposal adopts a principles-based, asset-neutral framework. It neither favors nor disfavors any particular asset class or investment strategy. Instead, it identifies six factors fiduciaries should consider when selecting any investment option — performance, fees, liquidity, valuation, benchmarking and complexity — reinforcing ERISA’s longstanding emphasis on process rather than outcomes.

By articulating a consistent evaluation framework, the proposal clarifies how fiduciaries should weigh tradeoffs, particularly for strategies that may be less liquid or more complex, without creating categorical exclusions. At the same time, fiduciary responsibility remains unchanged. Plan committees continue to be accountable for determining whether an investment is prudent in light of the plan’s objectives and circumstances.

The proposal also sharpens the DOL’s articulation of risk and return. The Department explicitly notes that selecting a lower risk strategy with a lower expected return may be entirely prudent when aligned with participant needs and plan objectives.

Market and litigation context for fiduciary standards

The proposal arrives amid a sustained wave of ERISA fiduciary litigation that has materially influenced sponsor behavior. As the DOL acknowledges in the preamble, many recent lawsuits have challenged plans with documented, prudent processes and ultimately failed — but only after imposing significant legal expense, discovery burdens and operational disruption. The proposal notes that concerns about litigation risk may lead to increased caution among sponsors, narrowing investment lineups and slowing adoption of active management and private markets, even where those approaches may support diversification and long-term outcomes.

Against that backdrop, the proposal makes clear that fiduciary decisions should be accorded significant deference, and that courts should demand more of plaintiffs’ lawyers when ERISA class action lawsuits are filed. Heightened scrutiny of private markets — including private credit — does not alter the fiduciary standard itself. The central inquiry remains whether an option improves the portfolio’s overall risk-return profile and diversification, supported by appropriate consideration of liquidity, valuation, fees and operational fit.

Practical implications for plan sponsors

Although future administrations could revisit aspects of the proposal, for most plan sponsors the key takeaway is continuity rather than change. Its core fiduciary principles are firmly grounded in longstanding ERISA standards. Prudent decision-making continues to rest on process, documentation, and context, rather than the policy priorities of any single administration.

For sponsors that choose to explore alternative investments, professionally managed vehicles — such as target date funds — are likely to remain the most practical entry point. These structures allow portfolio managers to manage sizing, pacing, liquidity and rebalancing within a broader portfolio design, reducing participant burden in assessing complex strategies directly. Fiduciary committees, however, retain responsibility for conducting and documenting robust due diligence.

Given competing views, revisions are likely before the rule is finalized, potentially over the next 12 months or so. In the meantime, plan sponsors should continue applying a consistent, well-documented fiduciary process — with greater confidence that thoughtful decisions will be evaluated as ERISA intends.