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

1) Start with the obvious question: Who in this deal is a “party in interest”?

A party in interest generally includes the employer, union, plan fiduciaries, service providers, and certain owners, officers, and relatives connected to those persons.  If anyone in the transaction fits one of those buckets, your §406 radar should already be on.

2) Red flag: Sale, exchange, or lease between the plan and a party in interest

If the plan is buying, selling, or leasing an asset to or from a party in interest, that is one of the classic prohibited-transaction categories.  A committee file should flag affiliated transfers, side-pocket sales, continuation-fund moves, and any internal reshuffling that appears to involve the plan trading with insiders or their affiliates.

3) Red flag: Lending money or extending credit

ERISA §406 squarely targets the lending of money or the extension of credit between the plan and a party in interest.  If the structure involves bridge financing, subscription facilities, delayed-funding mechanics, or any form of plan-supported credit exposure involving a service provider, sponsor affiliate, or insider, the file requires a separate prohibited-transaction review.

4) Red flag: Furnishing goods, services, or facilities

The plan’s use of a Manager, recordkeeper, adviser, insurer, custodian, valuation firm, or affiliate is not automatically illegal.  Still, it is squarely within the prohibited-transaction framework unless an exemption applies.  The DOL’s guidance makes clear that service-provider arrangements are allowed only where the services are necessary, the contract is reasonable, and the compensation is reasonable.

5) Red flag: Self-dealing by a fiduciary

Fiduciaries are prohibited from using plan assets in their own interest or for their own account.  If a fiduciary, committee Member, adviser, or affiliated Manager benefits from the selection, pricing, restructuring, or timing of the transaction beyond ordinary permitted compensation, that is a major danger sign.

6) Red flag: Acting on both sides of the transaction

A fiduciary cannot lawfully wear two hats in a way that places it on both sides of a plan transaction.  If the same organization is advising the plan, managing the product, controlling valuation inputs, or negotiating terms with an affiliated vehicle, the conflict is not cosmetic—it is exactly the kind of divided loyalty ERISA targets.

7) Red flag: Receiving additional consideration tied to the plan transaction

If a fiduciary or other relevant person receives commissions, revenue sharing, placement fees, trailing compensation, referral fees, markups, or any other personal benefit connected to plan assets, you may be staring at a prohibited transaction unless an exemption clearly covers it.  The DOL’s prohibited-transaction materials repeatedly treat conflicted compensation as something that needs protective exemptive conditions, not wishful thinking.

8) Red flag: Compensation that is not clearly reasonable

Even if a service arrangement may fit within an exemption framework, the compensation must still be reasonable.  If the file cannot explain the fees, incentive allocations, expense loads, valuation charges, or embedded compensation streams in plain English, that is a practical red flag that the committee has not yet cleared the §406 problem.

9) Red flag: Illiquid or hard-to-value affiliated products

The March 2026 proposal is generous in its prudent process, but it does not eliminate the need to scrutinize affiliated, illiquid, or hard-to-value products under §406.  If the plan is buying into a vehicle in which valuation is controlled by an affiliate, or in which exits, pricing, or redemptions depend on insiders, the prohibited-transaction analysis should be elevated.

10) Red flag: No exemption identified

If the team says, “It should be fine,” but nobody can point to a statutory, class, or individual exemption, the file is not fine.  ERISA prohibited-transaction rules are categorical, and the DOL repeatedly stresses that exemptive relief is available only when conditions are met and investor protections are built in.

11) Red flag: Weak documentation

A weak or silent file is its own danger sign.  The March 2026 proposed rule may help on the §404 prudence side when a fiduciary follows and documents a prudent process, but it does not create a documentation-free pass on the §406 side.  If the file does not analyze separate affiliations, compensation, services, and reliance on exemptions, the committee is walking around with its chin up.

One-Page Lender / Committee Checklist

ERISA 404 + 406 Quick Screen for Alternative or Nontraditional Investments

Use this as a Yes / No / Needs Follow-Up sheet.  If you get too many “Needs Follow-Up” answers, the deal is not ready for committee approval.  The first half is §404 prudence; the second half is §406 party-in-interest / prohibited transaction.

A. ERISA §404 Prudence Screen

1) Purpose and Fit

• Can we clearly state why this investment belongs in the plan lineup and what participants it serves?
• Does the option align with the operational reality of a participant-directed plan, including transfers, withdrawals, loans, and distributions?
• Is the investment being evaluated as part of the lineup architecture, not just as an isolated product pitch?

2) Performance / Benchmarking

• Did we review a reasonable number of comparable alternatives?
• Do we understand the expected risk-adjusted return net of fees over the correct time horizon?
• Have we identified a meaningful benchmark or the best available comparator?

3) Fees/value

• Are total fees and expenses known and documented?
• If this option costs more, is the added value clearly explained and documented?
• Did we compare cheaper share classes or cleaner implementation options?

4) Liquidity / Valuation / Complexity

• Can the investment meet plan-level and participant-level liquidity needs?
• Are valuation methods timely, accurate, and conflict-aware?
• Do we understand the product, or did we borrow conviction from the sales deck?
• If the product is complex, did we engage qualified outside expertise and document that reliance?

B. ERISA §406 Party-in-Interest / Prohibited Transaction Screen

5) Identify Relationships

• Is any party to the transaction a plan fiduciary, service provider, employer affiliate, officer, owner, relative, or other party in interest?
• Is any affiliated person or entity benefiting from the transaction beyond normal disclosed compensation?

6) Transaction Type

• Does the transaction involve a sale, exchange, lease, loan, extension of credit, or furnishing of goods/services/facilities with a party in interest?
• Is anyone effectively acting on both sides of the deal or controlling both the recommendation and the transaction mechanics?
• Is there any self-dealing, internal transfer, affiliated purchase, rollover incentive, or compensation arrangement tied to the plan decision?

7) Compensation and Exemptions

• Is all compensation fully identified, including direct, indirect, embedded, contingent, and affiliate compensation?
• Is the compensation reasonable, and can we prove it?
• If a prohibited-transaction issue exists, have we identified the specific exemption we are relying on?
• Are all conditions of that exemption satisfied and documented?

8) Documentation / Approval

• Does the file separately document §404 prudence and §406 prohibited-transaction analysis, rather than blending them into one vague memo?
• Do the committee minutes identify conflicts, affiliations, compensation, and reliance on exemptions?
• Would this file make sense to a judge, regulator, or plaintiff’s lawyer six months from now?  That is not drama; that is the real test.

Clean Decision Rule

• Approve only if the §404 file is strong and the §406 analysis is clean or clearly exempted.  Escalate to counsel/exemption review if there is any affiliated compensation, internal transaction, extension of credit, or unclear service-provider arrangement.

• Decline or defer if the committee cannot explain the structure, cannot identify all pay streams, or cannot name the exemption being relied upon.