Department of Labor Releases Long-Awaited Rule on Diversifying 401(k) Retirement Plan Assets

In accordance with President Trump’s executive order aimed at expanding access to retirement investments, the Department of Labor (DOL) has released its proposed rule to allow 401(k) investments in alternative asset classes. This would apply to all 401(k) plan holders in the United States and would allow plan sponsors the option to provide access to invest in alternatives. The proposed rule, “Fiduciary Duties in Selecting Designated Investment Alternatives,” will remove one of the biggest structural barriers preventing 401(k) plans from offering alternative asset classes and clarify how fiduciaries can evaluate those alternatives without fear of being sued under the existing terms of the Employee Retirement Income Security Act (ERISA).

Alternative asset classes include investments such as private equity, private credit, real estate, and digital assets. The proposed rule creates a safe harbor framework, ensuring that plan sponsors who thoroughly evaluate fees, performance, liquidity, and risk need not fear litigation in the event of financial losses or lack of liquidity.

For years, regulators have effectively discouraged 401(k) plans from offering alternative assets—not because the law prohibited them, but because the litigation risk under ERISA made plan sponsors understandably reluctant to act. The new proposal changes that by clarifying how fiduciaries can evaluate private market investments and receive legal protection if they follow a prudent and documented process. In other words, it restores the basic principle that fiduciaries should be allowed to make good-faith investment decisions without fear that every market downturn will lead to lawsuits.

Plan fiduciaries (i.e., the individuals or entities responsible for the management of retirement plans and their investments) are legally bound by their fiduciary duties as laid out in ERISA. The most commonly cited standard is “prudence,” which means carrying out duties “with the care, skill, prudence and diligence” of a prudent person. These fiduciary duties do not include any type of monetary or financial result requirement, as doing so would ignore the realities inherent in investment risk. Of course, any investment comes with a risk of loss, and in this case, there is no reason to treat alternative asset classes differently from public assets.

Aside from offering legal and regulatory protection, the proposed rule meaningfully modernizes retirement policy. Institutional investors (e.g., state pension funds, university endowments) have relied on private market diversification for decades, yet ordinary workers have been largely locked out. In fact, the allocation of investments in alternatives among public pensions is significant and steadily growing. According to recent data from the National Association of State Retirement Administrators, alternative investment allocation averages 33 percent among state pensions—an increase from the high 20s just a few short years ago. This also represents a reduction in allocation within public markets, which coincides with fewer initial public offerings. Incidentally, these diversified portfolios have also experienced superior returns when compared to public market exclusive retirement plans.

The proposed rule gives individuals the freedom to diversify their assets, choose a more aggressive investment approach if desired (something often recommended to younger plan holders), and to pool assets, giving individuals access to invest in vehicles that have been reserved for institutional and accredited investors for decades. While this rule would allow for investment in alternatives, it does not push riskier investments onto savers. It simply restores fiduciary discretion and allows retirement plans to reflect the way modern portfolios are typically constructed. If finalized after the public comment period, the proposal could open the door to broader diversification, potentially stronger long-term returns, and a retirement system that elevates middle-class savers instead of permanently limiting them to a narrow set of public market funds.