Unpacking the DOL ‘Safe Harbor’ for Alternative Investments

For plan fiduciaries seeking to add alternative investments to 401(k) lineups, the Department of Labor’s recently proposed rule, which offers a regulatory safe harbor, would make the proposition easier. However, the protections provided by the proposed safe harbor are limited and do not offer complete immunity, according to numerous sources.

The DOL proposal introduces a six-factor test that plan sponsors must use during investment selection to qualify for the safe harbor. The factors are: performance, fees, liquidity, valuation, benchmarking and complexity. According to Fred Reish, a counsel at the Ferenczy Benefits Law Center, this test alone sets a high standard for fiduciaries. Additionally, the Supreme Court’s 2024 decision in Loper Bright Enterprises v. Raimondo eliminated the so-called Chevron doctrine, which had previously required courts to defer to federal agencies’ interpretations when there were questions about how statutes were interpreted.

As a result, the proposed rule already imposes a rigorous test, and courts are not required to treat the safe harbor as anything more than one perspective on prudence.

“That’s a lot of conditions,” Reish says. “So, in my mind, this is not really a safe harbor.”

Not Absolute Immunity

The DOL’s proposed rule states that fiduciaries who follow a prudent process, such as the proposed safe harbor’s framework, should be entitled “to significant deference” in potential complaints alleging a breach of fiduciary duty. But the rule issued does not provide plan sponsors with complete protection from lawsuits. Plan participants could still pursue legal action and succeed if they demonstrate that the fiduciary’s process was inadequate or if a fiduciary’s decision was unreasonable.

Employers must continue to follow the Employee Retirement Income Security Act, and legal challenges could include arguments that the DOL’s proposed rule weakens ERISA’s protections for employees.

Charles Field, chair of Sanford Heisler Sharp McKnight’s ERISA litigation practice who represents plan participant plaintiffs, for one, says it will be difficult to price and evaluate assets that are not publicly traded, as valuations of private-market assets are subjective, and there are no standardized performance benchmarks available.

“I worry about [the DOL] talking about this being the golden age of retirement when it can turn into a nightmare,” Field says.

While the six factors that could offer a safe harbor are intended to help protect fiduciaries, some argue that the same factors could also lead to trouble.

“If you [complete] all six and you do them correctly, then you get that assumption and significant difference,” Reish says. “What happens if you miss a step? That suggests a reasonable implication that your process was imprudent.”

Post-Chevron Standards

The DOL’s proposed rule was not written to eliminate litigation altogether. However, the executive summary of the proposed rule does state: “The overarching goal of the proposed regulation is to alleviate certain regulatory burdens and litigation risk that interfere with the ability of American workers to achieve, through their retirement accounts, the competitive returns and asset diversification necessary to secure a dignified and comfortable retirement.”

Attorneys expect the proposed rule would substantially reduce litigation risk that may have discouraged plan sponsors from adopting alternative investments.

While the DOL’s rule provides meaningful support to fiduciaries worried about lawsuits, the absence of Chevron deference weakens the legal authority and protective power of the DOL’s guidance.

Prior to the Supreme Court’s 2024 Loper Bright opinion, courts deferred to agencies such as the DOL when interpreting ambiguous statutes. Since it was overturned, courts have no obligation to treat the DOL’s proposed rule as more than an opinion about how fiduciaries can display prudence.

“It’s kind of ironic that the people who spent a lot of time and energy trying to rid the system of the Chevron deference are now going to be arguing the that the Department of Labor’s position should be given great weight,” Field says.

While courts do not have to defer to the DOL’s rule, defense attorneys will likely cite the final version of the proposed rule once it is finalized. Given how specific the proposal is, judges will likely give it weight, but not defer to it completely, says Bob Ellerbrock, a partner in Burr & Forman’s employee benefits & executive compensation group.

“It provides a layer of protection, but the court doesn’t have to rely on it,” he says.