The proposed new rules will not change the prohibited transactions and party-in-interest questions. 

For explanation, review my article:

https://danharkey.com/post/erisa-pension-plans-real-estate-and-trust-deed-investor-must-comply

For Selecting a Designated Investment Alternative

1) Purpose and Fit

1.       What problem is this investment intended to solve for plan participants?  Is it meant to improve diversification, reduce volatility, enhance long-term risk-adjusted returns, provide lifetime-income features, or fill a gap in the plan menu?  The DOL frames prudence in terms of whether the option furthers the plan’s purposes for participants and beneficiaries.

2.       Is this investment appropriate for a participant-directed individual account plan?  The fiduciary should ask whether the structure, risks, liquidity, and operational features make sense in a 401(k)-type environment in which participants may transfer, rebalance, take withdrawals, or roll over assets.

3.       Where does this option fit in the lineup?  Is it a core option, a sleeve within an asset-allocation fund, a target-date component, or a more limited specialized offering?  The proposed rule expressly addresses both ordinary designated investment alternatives and asset-allocation funds that may contain alternative assets.

2) Process and Governance

1.       Did we follow a prudent process rather than chase a product story?  The proposal repeatedly emphasizes that ERISA prudence is grounded in process, not in favoritism toward or against any asset class.

2.       Who made the recommendation, and what authority did they have?  Confirm that the investment committee, named fiduciary, or delegated adviser had proper authority under the plan’s governance documents to review and select the option.  ERISA prudence depends not just on substance, but on a disciplined decision-making structure.

3.       Was the review objective, thorough, and analytical?  The DOL’s proposed safe harbor uses exactly that standard for the six major factors.  A prudent file should show that the fiduciary did more than rubber-stamp a marketing pitch.

4.       Do we have enough expertise to evaluate this investment ourselves?  If the investment is complex, the fiduciary must determine whether it has the skills, knowledge, experience, and capacity to understand it, or whether outside qualified help is required.

3) Performance Questions

1.       What are the expected risk-adjusted returns, net of anticipated fees and expenses?  The proposal says prudence requires evaluation of whether the investment’s expected returns, over an appropriate time horizon and after fees, further the purposes of the plan.

2.       What is the correct time horizon for judging this investment?  The DOL notes that retirement investment is long-term, and a prudent fiduciary should often give greater weight to long-term performance than to short-term noise.

3.       How does the investment behave in different market conditions?  A prudent file should examine downside risk, correlation, drawdowns, and whether the option improves portfolio construction rather than simply promising higher headline returns.

4.       How many comparable alternatives were reviewed?  The proposal expects fiduciaries to consider a reasonable number of similar alternatives before concluding that the chosen option is prudent.

4) fee and value Questions

1.       What are all-in fees and expenses?  Review management fees, incentive fees, operating expenses, administrative costs, liquidity-related costs, valuation expenses, and any embedded costs that may reduce participant returns.  Fees are one of the DOL’s six central factors.

2.       Are the fees appropriate relative to expected value?  The rule does not require the fiduciary always to choose the cheapest option; it requires the fiduciary to determine whether the fees are appropriate given the expected risk-adjusted returns and the other value the option provides.

3.       If this option costs more, what justifies the higher cost?  The DOL specifically contemplates that higher fees may be justified by diversification benefits, risk reduction, or lifetime-income features—but the justification must be documented.

4.       Did we compare share classes and implementation structures?  Choosing a more expensive share class where a materially identical lower-cost share class is available can signal imprudence if the fiduciary cannot explain the difference.

5) Liquidity Questions

1.       Can the investment meet anticipated plan-level and participant-level liquidity needs?  The DOL says fiduciaries must determine whether the option has sufficient liquidity for withdrawals, reallocations, loans, retirement distributions, and other participant events.

2.       Are there lockups, notice periods, gates, redemption caps, or transfer delays?  If so, the fiduciary should analyze whether those restrictions are compatible with participant-directed plan operations.

3.       If the investment includes illiquid assets, how much illiquidity is tolerable?  The proposal contemplates analysis of the maximum allocation to illiquid assets, expected time to monetize them, and how redemption restrictions interact with plan needs.

4.       Is there a credible liquidity risk-management program?  For certain vehicles, the DOL’s examples point to reliance on Investment Company Act liquidity programs or substantially similar written programs, provided the fiduciary critically reviews them.

6) Valuation Questions

1.       Can the investment be valued accurately and on the timetable that works for the plan?  The proposed rule requires fiduciaries to determine that the option has adequate measures to ensure timely and accurate valuation consistent with plan needs.

2.       Who performs the valuation, and are there conflicts?  A prudent review asks whether valuation is conflict-free and independent, especially where there is no readily observable public market price.

3.       How often are hard-to-value assets marked?  Quarterly valuations may be acceptable in some contexts, but the fiduciary should understand the methodology, data sources, assumptions, and controls.

4.       Are the disclosures and financial statements sufficient to test the valuation process?  The DOL’s examples specifically reference prospectus disclosures, public financial statements, governance structures, and independence of oversight.

7) Benchmarking Questions

1.       What is the meaningful benchmark for this investment?  The proposal defines a meaningful benchmark as one with similar mandates, strategies, objectives, and risks; no single benchmark works for every product.

2.       Is the benchmark comparable, or is it window dressing?  A prudent fiduciary should reject lazy comparisons—such as benchmarking a complex multi-asset strategy against a narrow public-equity index that does not reflect the investment’s design.

3.       If the product is innovative, what is the best available comparator?  The DOL says there should be no built-in bias against innovation, but innovation does not excuse weak benchmarking.  The fiduciary should identify the best possible comparators and scrutinize the claimed value proposition.

8) Complexity Questions

1.       Do we genuinely understand how this investment works?  Complexity is one of the six express prudence factors.  If the committee cannot explain the structure, risks, cash flows, and operational mechanics, the file is already in trouble.

2.       What operational, legal, accounting, custody, and participant-communication burdens come with this option?  Complexity is not just about investment theory; it also includes the practical burdens of administering the option within a participant-directed plan.

3.       What outside expertise did we use, and why was it appropriate?  Where the fiduciary lacks internal capability, prudent process means engaging qualified advisers and appropriately documenting reliance on them.

9) Monitoring Questions

1.       How will we monitor this investment after selection?  Prudence does not end at purchase.  ERISA fiduciaries must continue monitoring investments and service relationships over time. 

2.       What events will trigger re-review or removal?  Establish triggers such as benchmark drift, liquidity stress, valuation concerns, fee changes, Manager turnover, governance failures, or participant-usage problems.  Continued prudence depends on active oversight.

3.       Is the file documented well enough to survive litigation?  The entire thrust of the proposal is to give fiduciaries a safer litigation posture by allowing them to prove they followed a prudent process.  If the file is thin, the safe harbor becomes a theory rather than a protection.

Quick Documentation Checklist

A prudent file should usually contain:

• a written description of the investment and why it was considered;
• comparable alternatives reviewed.
• fee and share-class comparisons;
• liquidity and valuation analysis;
• benchmark analysis;
• complexity assessment and adviser input, if any.
• committee minutes showing the decision process; and
• a monitoring plan. 

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