U.S. DOL Proposes New Safe Harbour for DC Investment Selection: Takeaways for Canadian Plan Administrators
The U.S. Department of Labor (“DOL”) recently published proposed rules for a safe harbour from the duty of prudence regarding the selection of investment options offered under member-directed defined contribution retirement plans in the U.S. While the new proposed rules are not binding in Canada, they provide a “road map” of good practices when selecting and monitoring investment options offered under Canadian capital accumulation plans (“CAPs”) and are recommended reading for anyone involved in the selection and monitoring of investment options offered under Canadian CAPs.
Background on the Proposed Rules
On March 31, 2026, the DOL published a proposed regulation that is meant to establish a safe harbour for a fiduciary’s duty of prudence under the Employee Retirement Income Security Act of 1974 (“ERISA”) in connection with selecting designated investment alternatives (“DIAs”) for participant-directed individual account plans, e.g., 401(k) plans (the “Proposed Rules”). The definition of DIA is explained further below. Specifically, the Proposed Rules outline six factors that fiduciaries should consider when evaluating DIAs – and when plan fiduciaries “objectively, thoroughly, and analytically consider [these factors] and make a determination,” the DOL noted that “they should be able to confidently rely on that determination.”
The Proposed Rules respond to an August 2025 Executive Order on “Democratizing Access to Alternative Assets for 401(k) Investors”, which directed U.S. federal agencies to facilitate investment in alternative assets. Although the Proposed Rules respond to the Executive Order, the DOL did not to limit the Proposed Rules to only alternative investments because of the DOL’s concern that it could create the impression that alternative assets are either favoured or disfavoured.
The overarching goal of the Proposed Rules is to alleviate regulatory burden and litigation risk in connection with the selection of DIAs, including asset allocation funds that include investments in alternative assets, to offer the opportunity for participants to maximize risk-adjusted returns on their retirement assets net of fees.
Duty of Prudence
The Proposed Rules would establish a safe harbour for the duty of prudence. Under ERISA, plan fiduciaries must discharge their duties with care, skill, prudence, and diligence. The duty of prudence applies to plan fiduciaries in selecting and monitoring DIAs. The DOL emphasized that the duty of prudence is “largely a process-based inquiry” – thus, prudence is assessed based on the fiduciary’s investigation at the time of the investment decision, and not in hindsight based on the investment results.
The Proposed Rules
The key points of the Proposed Rules are as follows:
- Designated Investment Alternative: The Proposed Rules broadly define a DIA as “any investment alterative designated by the plan into which participants and beneficiaries may direct the investment of assets held in, or contributed to, their individual accounts.”
- Maximum Discretion to Further Purpose of Plan: Plan fiduciaries have maximum discretion to select investments to further the purposes of the plan. Neither ERISA nor the Proposed Rules require or restrict any specific type of DIA (subject to compliance with other applicable laws).
- Establishing an Investment Menu to Maximize Risk-Adjusted Returns: A fiduciary with responsibility or authority for selecting DIAs has a duty to act prudently when establishing a diversified menu of DIAs by enabling participants to maximize risk-adjusted returns on investment, net of fees, across their entire portfolio. This allows participants with different risk capacities to maximize their returns for a given level of risk. The duty of prudence applies not just to the selection of each DIA, but also to the collection of DIAs (i.e., to both the individual parts and the sum).[1]
- Consideration of All Relevant Factors: To satisfy the duty of prudence when selecting a DIA, the fiduciary must follow a prudent process under which it gives appropriate consideration to the facts and circumstances that the fiduciary knows or should know are relevant to the particular DIA.
- Process-Based Safe Harbour: A new process-based safe harbour for fiduciaries to use when selecting DIAs is introduced. When a plan fiduciary “objectively, thoroughly, and analytically” considers, and makes a determination following the process with respect to the six factors outlined in the Proposed Rules, its judgment is presumed to be reasonable and is entitled to significant deference. The six factors are as follows:
- Performance: The fiduciary must appropriately consider a reasonable number of similar investment alternatives and then must determine that the risk-adjusted expected returns of the DIA, over an appropriate time horizon and net of anticipated fees and expenses, furthers the purposes of the plan by enabling participants to maximize risk-adjustment returns. Notably, the DOL has noted that fiduciaries need not select an investment strategy with the highest possible return but should instead seek to maximize returns given an appropriate level of risk.
- Fees: The fiduciary must objectively, thoroughly, and analytically assess a reasonable range of investment alternatives and determine that fees and expenses of the DIA are appropriate based on the expected risk-adjusted returns and any additional benefits, features or services such alternatives may provide to the plan. A fiduciary does not need to select the investment alternative with the lowest fees and expenses – a prudent fiduciary could choose to pay more in exchange for greater services.
- Liquidity: A fiduciary must appropriately consider and determine that the DIA will have sufficient liquidity to meet the anticipated needs of the plan at both the plan and individual levels. Plans do not need to offer fully liquid investment options – ERISA gives fiduciaries discretion to offer DIAs that contain illiquid alternative investments – but fiduciaries must ensure that investments can deliver on any promises of liquidity that are made to participants.
- Valuation: The fiduciary must appropriately consider and determine that the DIA has adopted adequate measures to ensure that the DIA is capable of being timely and accurately valued in accordance with the needs of the plan.
- Performance Benchmark: The fiduciary must appropriately consider and determine that each DIA has a meaningful benchmark and compare the risk-adjusted expected returns, net of fees, of the DIA to the meaningful benchmark. A “meaningful benchmark” is defined as “an investment, strategy, index, or other comparator that has similar mandates, strategies, objectives, and risks to the [DIA].” There may be multiple meaningful benchmarks for a single investment alternative, but no benchmark will suit all DIAs on a plan’s investment menu.
- Complexity: The fiduciary must appropriately consider the complexity of the DIA and determine that it has the skills, knowledge, experience and capacity to comprehend it sufficiently to discharge its obligations under ERISA and the plan documents, or whether it must seek assistance from a third-party service provider. If a fiduciary opts to engage outside expertise, they must prudently in the selection of the third-party service provider, taking into account their expertise and compensation.
Overall, the DOL stresses that the relevance of each factor will depend on the particular investment and the plan’s circumstances (in other words, no single factor is determinative).
- Duty to Monitor: The DOL is generally of the view that the factors and processes outlined in the Proposed Rule apply to the duty to monitor DIAs, but it anticipates issuing interpretative guidance in the near term regarding the duty to monitor.
Status of the Proposed Rules
The DOL has invited comments on the Proposed Rules by June 1, 2026. In particular, the DOL noted that there have been proposals from stakeholders on including additional factors such as participant profiles, particularly in the context of target date funds and managed accounts, and requests input in that respect.
Takeaways for Canadian Plan Administrators
As noted above, the Proposed Rules are not binding in Canada, but they are noteworthy because they provide a “road map” of good practices when selecting and monitoring investment options offered under Canadian CAPs. Many of these factors are noted in CAPSA Guideline No. 3 – Guideline for Capital Accumulation Plans as applicable to selecting and monitoring investment options offered under capital accumulation plans.
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[1] The focus of the Proposed Rules is on the application of the duty of prudence to the selection of an individual DIA for the plan’s investment menu. The Proposed Rules do not address the question of how to prudently curate a menu of investments overall, and the DOL noted that this question is beyond the scope of the Proposed Rules.
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