Mayer Brown Submits Comment Letter on DOL Proposed Investment Selection Rule on Behalf of Coalition of Investment Managers and Investment Advisers

Dear Assistant Secretary Aronowitz:

The Coalition for Modern Retirement Solutions (“CMRS”), by and through its representatives Erin K. Cho and Richard E. Nowak of Mayer Brown LLP, hereby respectfully submits this comment letter in response to the Department’s proposed regulation titled Fiduciary Duties in Selecting Designated Investment Alternatives. CMRS is a coalition of investment managers and investment advisers that collectively manage trillions in retirement assets for millions of Americans. In the United States, the members of CMRS and their affiliates sponsor a variety of investment products including open-end investment companies registered under the Investment Company Act of 1940, as amended (“40 Act”), closed-end investment companies registered under the 40 Act (including interval funds and tender offer funds), funds that elect to be regulated as business development companies under the 40 Act (“BDCs”), funds that are public reporting companies registered under the Securities Exchange Act of 1934 (“Exchange Act”) and private funds managed by investment advisers registered under the Investment Advisers Act of 1940 (“Advisers Act”) or U.S. regulated banks, savings and loan associations, and insurance and trust companies. CMRS members also act as “investment managers” as the term is defined under Section 3(38) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or as investment advisers within the meaning of Section 3(21)(A)(ii) of ERISA. In their capacity as fiduciaries under ERISA Sections 3(38) and 3(21), CMRS members act in accordance with the fiduciary standards set forth in Section 404 of ERISA with respect to their ERISA governed employee benefit plan clients.

We commend the Department for adopting an asset class neutral framework in the proposed rule, which appropriately recognizes that fiduciary obligations under ERISA are grounded in a prudent process rather than in the selection or exclusion of any particular category or type of investments. The Department’s approach and the proposed rule are consistent with the text and purpose of ERISA, which requires the exercise of prudence and loyalty in investment decisions without prescribing or proscribing specific asset classes for plan investment menus. By refraining from favoring or disfavoring any particular types of investments, the Department affirms the longstanding premise of ERISA that the federal government should not substitute its own judgment for that of plan fiduciaries in determining which assets are best suited to meet the needs of a particular retirement plan and its participants.

We also support the Department’s efforts to encourage innovation in investment products available to defined contribution plan participants. Making investment products with allocations to private investments available to retirement savers can improve diversification, reduce volatility, provide a hedge against public market downturn risk, and enhance risk-adjusted returns over the long-term. Private market assets, especially real estate, have been offered in defined contribution plan investments for more than two decades, typically as part of a modest sleeve within a target-date fund or a professionally managed account managed by sophisticated investment managers . This measured approach is consistent with academic and industry research reflecting that portfolios incorporating private assets improve retirement outcomes due to higher compounded returns, higher risk-adjusted returns, and lower volatility compared to portfolios composed exclusively of publicly traded securities.

Final Rule Should Support the Offering of Collective Investment Trusts

In furtherance of the Department’s thoughtful proposal, we encourage the Department to amend the final rule to more effectively support target-date funds and similar multi-asset class funds that are structured as collective investment trusts (“CITs”). We agree that a professionally managed multi-asset class solution, such as a target-date fund, can be the most effective way to incorporate private investments into defined contribution plans while maintaining appropriate levels of risk across the participant lifecycle. As currently drafted, however, the proposed rule appears to favor open-end funds registered under the 40 Act as the most appropriate fund vehicle for delivering diversified investment strategies to plan participants. CITs have long been a widely utilized and cost-effective vehicle for defined contribution plan investments. More than 40 percent of defined contribution plan assets are currently invested in CITs and the incredible growth in CIT assets over the past decade (from 23 percent to 42 percent) reflects that they have become the established investment vehicle of choice for defined contribution plans due to their flexibility, governance structure, and cost-effectiveness.

Our two decades of experience structuring products for defined contribution plans has shown that 40 Act funds that include private market asset classes can be less liquid or have embedded fees and expense ratios that are higher than those obtainable by  defined contribution plans (which have been repeatedly targeted in litigation for offering higher cost actively managed funds) through CITs. CITs are a uniquely compatible investment vehicle for ERISA defined benefit and defined contribution plans because they operate under the same trust, tax, and ERISA regimes. As such, CITs offer the flexibility to structure and hold the same broadly diversified portfolios that are considered prudent for pension trusts and other institutional investors while offering investors  lower fees and expense ratios when compared to mutual funds.

Regulations issued by the Office of the Comptroller of the Currency or state banking authorities govern CITs. These rules and regulations add a layer of oversight and protection and impose requirements that may include, among others, regular audits, governance procedures, processes with respect to valuation and redemptions, compliance with prohibitions against conflicts of interest and self-dealing, and specific guidelines regarding the charging of fees and expenses. In addition, and importantly, in a CIT structure the CIT trustee is a fiduciary subject to the full scope of the fiduciary requirements in ERISA Section 404, along with the prohibited transaction rules in ERISA Section 406. This provides an additional layer of fiduciary oversight and participant protection. Section 3(c)(11) of the 40 Act also requires CIT trustees, who must be either a national bank or an institution regulated by state banking authorities, to exercise substantial investment responsibility over the CIT rather than merely acting in a custodial capacity (“Qualified Trustee”). In addition, the Internal Revenue Service (“IRS”) has issued a series of revenue rulings and guidance requiring CIT trustees to satisfy a number of requirements to maintain the tax qualified status of the CIT. The IRS rulings reiterate ERISA’s exclusive benefit requirement that the corpus of the trust cannot be used for any purpose other than for the exclusive benefit of plan participants or their beneficiaries.

CIT trustees also provide comprehensive disclosures, including fund fact sheets, to prospective investors. These disclosures often include, for example, descriptions of the terms, fees, expenses, and risk factors (along with ERISA and tax considerations) similar in substance to the disclosures provided by 40 Act funds.

We encourage the Department to make clear in the final rule that a plan fiduciary may satisfy the safe harbor by selecting a plan investment, including a target-date fund, with a CIT structure. We also recommend that the Department include at least one illustrative example of a fiduciary satisfying the safe harbor and engaging in a prudent process when selecting an investment with a CIT structure, as provided later in this comment letter. 

Final Rule Should Provide Flexibility for Fulfilling Fiduciary Duty of Prudence

We greatly appreciate the Department’s effort in providing thoughtful examples to help plan fiduciaries engage in a prudent process when selecting plan investments. However, because the duty of prudence is necessarily context specific, we urge the Department to clarify in the final rule that its examples are non-prescriptive illustrations of how a plan fiduciary can comply with the duty of prudence, rather than a specific list of requirements for plan fiduciaries or a strict inventory of permitted scenarios. To that end, we encourage the Department to consider moving the examples from the regulatory text to the preamble of the final rule, with revisions to the specific examples in the proposed rule as set forth below. However, to the extent the Department and other commentators believe it is beneficial to have examples included in the final regulation itself, we would recommend including more general examples that provide plan fiduciaries with the flexibility needed to engage in a range of reasonable judgments along with a statement that the examples are intended to be illustrative only. The more specific examples from the proposed rule should be included in the preamble. Because investment products continue to evolve, for the final rule to stand the test of time, it is important that neither the final rule nor the examples be too rigid in their framing or in their application.

Comments on Specific Safe Harbor Factors and Examples

Please see below our comments with respect to certain of the safe harbor factors and the related examples.

Section (j) - Valuation.

Example (j)(iv). Valuation; FASB 820. The example provides that a plan fiduciary can rely on a valuation of a non-publicly traded investment if the valuation is based on procedures that satisfy the Financial Accounting Standards Board Accounting Standards Codification 820, titled Fair Value Measurements (“FASB 820”). We respectfully request that the reference to a “conflict free, independent process” be removed from this example as this terminology does not appear in (and is therefore not required by) FASB 820. With respect to assets and liabilities that lack active market data, FASB 820 requires that fair value measurements based on unobservable (Level 3) inputs include the reporting entity’s own internal assumptions, forecasting models, management judgment, and other proprietary data and assumptions about how market participants would value the asset or liability. The language in the final rule should reflect how valuations are performed in the marketplace under FASB 820, which focus on appropriate conflict mitigation, oversight, and full disclosure rather than the complete elimination of conflicts.

Example (j)(4). Valuation; Conflicts of Interest. We also recommend the Department remove Example (j)(4), which addresses continuation funds. This example does not reflect the realities of the defined contribution plan market. In our experience, a continuation fund would never constitute a stand-alone designated investment alternative in a defined contribution plan lineup (and we are not aware of any existing defined contribution plans offering a stand-alone continuation fund as an investment option). We also believe that removing this example would be more consistent with the Department’s asset class neutral framework, which does not favor or disfavor any particular investment strategy, vehicle, or structure.

We also respectfully request that the Department add an additional valuation example in the preamble along the lines of the following, with the conclusion that the plan fiduciary satisfied the consideration and determination requirements of paragraph (j) and ERISA Section 404(a)(1)(B):

A participant directed individual account plan offers a designated investment alternative that is a target-date fund structured as a CIT. The target date fund, relying on Section 3(c)(11) of the 40 Act is maintained and managed by a Qualified Trustee and invests in another CIT managed by the Qualified Trustee, which allocates the majority of its assets to an underlying fund that includes private market asset classes. The underlying fund is either (i) registered as an investment company under the 40 Act, (ii) a BDC, or (iii) is a fund that is not an investment company by reason of an applicable exclusion in Section 3(c) of the 40 Act. In each case, the fund is managed by an investment adviser that is registered under the Advisers Act, a U.S. regulated bank, or insurance company (“Fund Manager”). The Qualified Trustee allocates the remaining assets of the CIT towards highly liquid public market asset classes (“Liquid Pool”). The Qualified Trustee is comfortable that the Fund Manager has reasonable controls and procedures in place to manage any material valuation conflicts. Examples of such controls and procedures may include the following:

• Regular external audits of fund financials;
• Periodic risk assessment and management of material valuation risks;
• Regular and prompt reporting or disclosure of conflicts to investors including the Qualified Trustee, including reporting of material changes in valuation risks;
• A requirement that valuation and management teams have separate reporting lines;
• Governance procedures to assess the foregoing and to manage escalations, exceptions and approvals to changes of policy; and
• The incorporation of pricing information or valuations furnished by third parties, including appraisal firms and pricing services.

The Qualified Trustee receives valuations from the Fund Manager after each regular valuation date of the underlying Fund, which may be monthly or quarterly and, with respect to the Liquid Pool, on each business day. The Qualified Trustee evaluates this information and determines the fair value of the units of the CIT on each business day in accordance with the valuation standards it deems applicable under the circumstances. The Qualified Trustee generally determines the value of each unit by subtracting the total liabilities from the total assets of the CIT (after deducting certain CIT expenses, reserves, or liabilities) and dividing the remainder by the number of units outstanding.

Section (i) - Liquidity.

With respect to Section (i) “Liquidity,” the Department should clarify in the final rule that the manager of the designated investment alternative (e.g., the manager of the target-date fund or managed account) is responsible for managing liquidity to accommodate both participant and plan liquidity needs in accordance with the terms of the designated investment alternative and applicable law. If a target-date fund or managed account incorporates private market asset classes, those assets may be relatively illiquid, but the managers manage this by also including liquid assets in the target-date fund or managed account.

The examples in the proposed rule under Section (i) contemplate the plan fiduciary obtaining representations or conducting due diligence on the investment vehicle’s liquidity program to ensure it is substantially similar to Rule 22e-4 of the 40 Act. Rule 22e-4, however, does not apply to CITs and it is also not necessarily utilized for other funds that rely on an exception from the 40 Act. Therefore, the condition in Examples (1)(iii), (3)(iii)(B), and (4) of this Section requiring a plan fiduciary to obtain a representation from the manager of the designated investment alternative that it has a liquidity risk management program that is substantially similar to what is required under the 40 Act is not feasible. Accordingly, we respectfully request that the Department remove the references to Rule 22e-4. Similarly, the Department should also remove the references to the fiduciary receiving representations from fund managers in the examples.

In lieu of the above references, a plan fiduciary should be deemed to satisfy the liquidity factor if it performs reasonable diligence and research to confirm that the manager of the designated investment alternative has controls and procedures in place to appropriately identify, manage, and escalate liquidity risk. For example, such diligence could include the fiduciary substantiating that the manager has controls and procedures to assess, manage, and periodically review liquidity risk (at least annually). Such procedures may include, as applicable, the following:

• The investment strategy and liquidity of portfolio investments, including whether the investment strategy is appropriate and the extent to which the strategy involves a relatively concentrated portfolio or large positions in particular issuers;
• The use of borrowings for investment purposes and derivatives;
• Holdings of cash and cash equivalents, as well as borrowing arrangements and other funding sources; and
• A process for escalating identified liquidity risks.

Example (i)(3)(iii)(A). Plan-level liquidity. The Department should remove the requirements that the plan fiduciary needs to diligence (and monitor) the target-date fund manager’s ability to sell the underlying investments for full value as well as the time until such investments return capital. Placing these obligations on plan fiduciaries is highly impractical, particularly where the underlying investment vehicle is a fund-of-funds, which is typical for target-date funds.

Section (h) - Fees. The proposed rule clarifies that plan fiduciaries may select a higher-cost option if they reasonably determine it offers commensurate benefits, features, or services other than risk-adjusted returns. With respect to fund-of-fund structures such as target-date funds, plan fiduciaries should review and understand whether fees are assessed at only one level or whether there are additional layers of fees at the underlying fund levels. The fact that target-date funds structured as CITs and managed account strategies utilize a sophisticated professional manager subject to ERISA’s fiduciary standards provides an extra layer of protection for plan fiduciaries. While we agree with the principles laid out under this factor of the proposal, some of the examples should be revised, as set forth below.

Example (h)(4). Fees; Risk Mitigation Strategies: This example suggests that adding a private assets sleeve to an existing target-date fund effectively creates a new fund, which would require the plan fiduciary to conduct a fulsome investment selection evaluation process. We respectfully request that this example be removed or revised. Adding a private assets sleeve to a target-date fund or managed account strategy should not automatically result in, or require, an analysis comparable to picking a new fund. For example, when private market asset classes are added to a target-date fund, those additions do not necessarily change the glidepath. In other words, the overall equity and bond allocations may remain the same, but the allocations simply include both publicly and privately offered securities. The plan fiduciaries would receive disclosure of the additional components and information about fees and expenses. Furthermore, allocations to private market asset classes can vary, e.g., from 5% to 20%. Whether an allocation to private market asset classes should require a de novo wholesale review of the fund marketplace should be a facts and circumstances analysis.

Example (h)(5). Fees; Active Management: This example may be read to suggest that a plan fiduciary may only choose an actively managed fund (with higher fees and expenses) if it also selects a companion passive fund (with lower fees) within the same strategy, in order to secure diversification benefits for participants across the investment lineup. We believe that stand-alone actively managed funds (without a passive fund counterpart) can be prudently offered to plan participants. We therefore respectfully request that the Department revise this example.

Comments on Aspects of the Proposed Rule That Implicate Litigation

Duty to Monitor

In the preamble to the proposed rule, the Department states that it “anticipates issuing interpretive guidance in the near term concerning fiduciary obligations under ERISA to monitor designated investment alternatives following their inclusion on a plan’s investment menu.” We encourage the Department to issue this guidance because the vast majority of ERISA class action lawsuits involving plan investments allege that the plan fiduciaries failed to monitor or timely remove allegedly imprudent plan investments, rather than challenging the initial investment decision. In addition, we recommend that the guidance provide plan fiduciaries with sufficient flexibility to engage in a range of reasonable judgments when monitoring plan investments. For example, while a prudent plan fiduciary may appropriately focus on certain factors when selecting a plan investment, it may be reasonable for the fiduciary to focus on different factors when monitoring that plan investment. In the meantime, the final rule should provide that a plan fiduciary that satisfies the safe harbor requirements during an appropriate investment monitoring cycle is presumed to have satisfied the duty of prudence.

Compliance with the Rule’s Safe Harbor is Not Required to Satisfy Duty of Prudence

We request that the Department make clear in the final rule that adherence to the safe harbor is optional and not required for a plan fiduciary to satisfy the duty of prudence with respect to the selection of plan investments. The U.S. Supreme Court has correctly emphasized that categorical rules are inconsistent with the duty of prudence’s “context-specific inquiry” and that fiduciaries may make a “range of reasonable judgments” based on their “experience and expertise.” Hughes v. Nw. Univ., 595 U.S. 170 (2022). The proposed rule recognizes that plan fiduciaries currently live in fear of meritless litigation because ERISA plaintiff law firms use the benefit of hindsight to second guess and challenge prudent investment decisions. If given the opportunity to do so, these law firms will argue that a plan fiduciary’s alleged failure to adequately consider even one of the safe harbor factors means they acted imprudently. The final rule should explicitly say that, while the safe harbor protects the plan fiduciaries who adhere to it, it is simply one avenue for complying with their fiduciary obligations. To that end, we recommend the Department include in the final rule language similar to the existing annuity selection safe-harbor regulation, which states that compliance with the safe harbor is optional and the regulation “does not establish minimum requirements or the exclusive means for satisfying” the duty of prudence. See 29 C.F.R. § 2550.404a–4(a)(2).

We also request that the final rule state that a plan fiduciary does not necessarily need to satisfy all six factors for every plan investment to be entitled to the safe harbor. The final rule should clarify that a fiduciary’s adequate consideration of the factors applicable to the investment being considered (which may include a determination that certain factors are not applicable) is sufficient to satisfy the safe harbor and the duty of prudence. 

Finally, we recommend that the Department not expand the list of enumerated factors—which we believe are sufficient to cover the vast majority of investment options—and also clarify that plan fiduciaries are not required to consider other factors to satisfy the safe harbor or the duty of prudence. Along these lines, the Department should omit the term “non-exhaustive” from the final rule. Without these clarifications, ERISA plaintiff law firms will seek to use the final rule to argue in hindsight that a plan fiduciary failed to consider some unidentified factor during the investment selection process and thereby breached the duty of prudence. The final rule needs to provide predictability and adequate assurances for plan fiduciaries that their well-reasoned investment selection decisions will not be second guessed.

Final Rule Should Retain Language Regarding Fiduciary Deference

In the preamble to the proposed rule, the Department makes a very important statement that goes to the heart of ERISA’s fiduciary principles: “When a plan fiduciary objectively, thoroughly, and analytically considers, and makes a determination following the described process with respect to, any of the six factors outlined in the paragraphs, its judgment regarding the factor or factors is presumed to be reasonable and is entitled to significant deference.” The Department’s statement is consistent with longstanding Supreme Court jurisprudence, including Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 111 (1989), and Hughes v. Northwestern University, 595 U.S. 170 (2022), and the trust law principles upon which ERISA is based. See Restatement (Second) of Trusts § 187 (Am. Law Inst. 1959) (“Where discretion is conferred upon the trustee with respect to the exercise of a power, its exercise is not subject to control by the court except to prevent an abuse by the trustee of his discretion.”). We agree with the Department that, if these principles of deference are correctly applied, plan fiduciaries who engage in a prudent process or “make[] a determination regarding any or all of the six factors should be able to confidently rely on that determination without undue fear of litigation.”

Burden of Proof

The Department should also retain the preamble discussion in the proposed rule that ERISA plaintiffs bear the burden of proving that a plan fiduciary breached the duty of prudence when selecting a plan investment. Consistent with our comment above that the safe harbor is not the only means by which a plan fiduciary can satisfy the duty of prudence and the Department’s recognition of appropriate fiduciary deference, the final rule should state that neither it nor the safe harbor sets forth any new standards under which a plan fiduciary bears the burden of proof. The Department should avoid a scenario where the final rule unintentionally creates a pleading standard akin to the prohibited-transaction pleading standard following Cunningham v. Cornell University, whereby a fiduciary’s adherence to the safe harbor (or compliance with the duty of prudence) cannot be resolved on a motion to dismiss. While the proposed rule and safe harbor are correctly focused on the scope of the duty of prudence—which largely goes to a merits defense—the Department should make clear that the safe harbor is not an affirmative defense for which the plan fiduciary bears the burden of proof.

Use of External Investment Fiduciaries

The Department should make clear in the final rule that plan fiduciaries with the requisite level of investment experience and expertise are not required to engage an investment manager under ERISA Section 3(38) or an investment adviser under ERISA Section 3(21)(A)(ii) to satisfy the safe harbor or the duty of prudence. Because almost every example in the proposed rule describing a prudent process includes a reference to the plan fiduciary using an external investment adviser, we are concerned ERISA plaintiff law firms may use the final rule to second guess plan fiduciaries who do not require or engage an external investment adviser. ERISA’s statutory text does not require a fiduciary to engage an external investment adviser, and not every plan has the resources to engage one. And while an external investment adviser may be advisable for some plans, many large plan sponsors have the requisite internal experience and expertise to comply with their fiduciary obligations and many smaller plan sponsors may not require an external investment adviser depending on their plan’s investment lineup. For that reason, we recommend that the Department explicitly state in both the preamble and the regulatory text of the final rule that a plan fiduciary is not required to hire an external investment adviser to satisfy either the safe harbor or the duty of prudence. The Department should also consider removing references to the plan fiduciary’s engagement or non-engagement of an external investment adviser from one or more of the examples.

The Department should also clarify in the final rule that plan fiduciaries who engage an external investment adviser may, consistent with the duty of prudence, rely in good faith on the adviser’s objective recommendations and analyses of the investment options being considered. All too often, ERISA plaintiff law firms use hindsight to challenge the recommendations of sophisticated external investment advisers while simultaneously suing the plan fiduciaries for reasonably relying on the advisers’ recommendations. While ERISA plaintiff law firms sometimes frame their claim as an alleged failure to monitor the external investment adviser, in reality they are arguing that the plan fiduciaries who appropriately retained the assistance of an external investment adviser were nonetheless required to have the same level of investment experience and expertise as the external adviser—an impossible standard. Absent any objectively apparent red flags, plan fiduciaries should be able to reasonably rely on the recommendations of their external investment advisers to satisfy the safe harbor and the duty of prudence.

Investment Time Horizons

The Department should clarify in the final rule that it is reasonable and appropriate for a plan fiduciary to focus on longer time horizons and full market cycles when evaluating past and prospective investment performance. In Smith v. CommonSpirit, 37 F.4th 1160, 1166 (6th Cir. 2022), the Sixth Circuit correctly recognized in affirming the dismissal of a meritless target-date fund challenge that the plaintiffs could not plausibly allege the investment decision was imprudent by merely “pointing to another investment that has performed better in a five-year snapshot of the lifespan of a fund that is supposed to grow for fifty years does not suffice to plausibly plead an imprudent decision.” The Sixth Circuit further explained that “selling a well-constructed portfolio in response to disappointing short-term losses . . . is one of the surest ways to frustrate the long-term growth of a retirement plan.” Much of the ERISA retirement plan litigation today is focused on alleged short-term underperformance even though plan fiduciaries correctly focus on helping their participants achieve successful retirement outcomes decades in the future. The Department should emphasize in the final rule and in any forthcoming guidance regarding the duty to monitor that plan fiduciaries may focus on longer time horizons and need not engage in knee-jerk reactions in response to short-term underperformance.

Clarification Regarding Benchmarking Requirements

The Department should clarify in the final rule that the “performance benchmark” factor in Section (k) is distinct from the “meaningful benchmark” standard that many courts apply at the pleading stage in ERISA class action lawsuits and that is currently before the Supreme Court in Anderson v. Intel Corp. Investment Policy Committee, No. 25-498. Unlike the proposed rule—which focuses on the investment selection process—the “meaningful benchmark” pleading standard addresses whether an ERISA plaintiff challenging a plan investment based on comparative underperformance has identified sufficiently similar comparator investments that would permit a plausible inference that the fiduciary engaged in an imprudent process. Given the likelihood that the Supreme Court will not decide Anderson until after the Department issues the final rule, the Department should avoid framing the final rule in a way that could support an Administrative Procedure Act challenge, for example, if the Supreme Court were to hold that a meaningful benchmark is not required to plausibly allege a breach of the duty of prudence. Accordingly, we recommend the Department not use the term “meaningful benchmark” and instead use a term like “appropriate benchmark” or “appropriate comparator” to make clear that the final rule is not addressing the litigation pleading standard. We also recommend, as discussed above, that the Department not opine in the final rule on the appropriate pleading or motion to dismiss standard.

In addition, the Department should clarify that a plan fiduciary may reasonably rely on an appropriate benchmark identified or prepared by the fund manager when evaluating a plan investment. As we see today with the custom benchmarks for many target-date funds, the fund manager is best positioned to create an appropriate benchmark that reflects the particular mandate, strategy, objective, risks, and asset allocation of a specific fund. Most plan fiduciaries are not well-positioned to create their own custom benchmarks when considering plan investments and imposing such an obligation will encourage more meritless litigation while discouraging product innovation.

No Retroactive Prudence Requirements

The Department should also clarify that the final rule does not establish any retroactive standards or requirements for a plan fiduciary to satisfy the duty of prudence. ERISA class action lawsuits challenging plan investments are almost always backwards looking (up to six or more years). For that reason, we expect that ERISA plaintiff law firms will seek to argue that the final rule and the six enumerated factors establish that a plan fiduciary breached the duty of prudence years earlier when selecting an investment option. The Department should include an express statement in the final rule that nothing in the regulation shall be construed to have retroactive effect or to establish a standard of conduct for any period prior to its effective date.

Limit Use of Adverbs and Adjectives

Finally, while we agree with and appreciate the language and emphasis in the proposed rule, we recommend that the Department omit from the final rule any adverbs or adjectives that might be construed as applying subjective criteria to the duty of prudence or that could be challenged as inconsistent with ERISA Section 404. In Compliance Assistance Release 2025-01, the Department correctly criticized the use of the term “extreme care” in Compliance Assistance Release 2022-01 because that standard is “not found” in ERISA and “differs from ordinary fiduciary principles thereunder.” The final rule will be less susceptible to opportunistic legal challenges if it avoids the use of terms or descriptors that are not found in ERISA. In addition, limiting the use of unnecessary adverbs and adjectives is consistent with the Department’s goal of providing an objective safe harbor to plan fiduciaries.

The Department Should Modernize Prohibited Transaction Class Exemption 77-4

CMRS commends the Department for its substantial undertaking in proposing an asset class neutral framework that will facilitate and encourage innovation in investment products available to defined contribution plan participants. Consistent with the directive in Executive Order 14330, Democratizing Access to Alternative Assets for 401(k) Investors, the Department should also amend Prohibited Transaction Class Exemption 77-4 (PTE 77-4) to expand its scope beyond open-end mutual funds. PTE 77-4 is a widely used exemption that provides relief for an employee benefit plan’s purchase and sale of shares in an open-end mutual fund when the manager or one of its affiliates also serves as the investment adviser to the mutual fund. The exemption precludes a double-layered fee, which mitigates the potential for conflicts and reduces overall costs for plan investors, and requires informed consent by an independent fiduciary of the plan. Despite the tremendous growth in investment products since 1977, the exemption has not been updated on a class basis to include additional investment types. Instead, what has developed is a patchwork of over 60 individual exemptions related to PTE 77-4 that provide greater flexibility and liberties to plans who offer products from some managers but not others. We support the Administration’s and the Department’s laudable goal of providing millions of Americans with greater access to a wider range of investment products that can help improve diversification, reduce volatility, provide a hedge against public market downturn risk, and potentially enhance risk-adjusted returns over the long term. We believe this goal can be accomplished through an expansion of PTE 77-4 to cover a broader range of investment products including, among others, all registered investment funds, BDCs, funds that are not reporting companies registered under the Exchange Act, and private funds, while maintaining the exemption’s existing protections for plans and participants. This expansion would remove the existing structural impediment to modernizing America’s retirement system, while ensuring that plan fiduciaries continue to act prudently and in the best interests of the plan and its participants under ERISA Section 404.

Conclusion

CMRS greatly appreciates the Department’s thoughtful consideration in proposing asset-neutral guidance that will be of great assistance to plan fiduciaries in selecting investment options for their defined contribution plans. We look forward to working with the Department to ensure that plan fiduciaries have the opportunity to consider and offer innovative investment products that are in the best interests of their participants and their retirement outcomes.

¹ The final rule should confirm that a plan fiduciary selecting a managed account may rely upon the safe harbor regardless of whether the managed account is offered as a qualified default investment alternative, a designated investment alternative or a managed account strategy within a defined contribution plan. The plan fiduciary can prudently select and evaluate a manager and the investment options that it will utilize in a manner that is consistent with the process set forth in the safe harbor.

² See, e.g., Angela Antonelli, The Evolution of Target Date Funds: Using Alternatives to Improve Retirement Plan Outcomes, Geo. Univ. McCourt Sch. of Pub. Pol’y Ctr. for Ret. Initiatives (June 2018); Angela Antonelli, Making the Case: The Effect of Private Market Assets on Retirement Income in Cases of Disrupted Savings, Geo. Univ. McCourt Sch. of Pub. Pol'y Ctr. for Ret. Initiatives (Aug. 2025); Angela Antonelli, Can Asset Diversification & Access to Private Markets Improve Retirement Income Outcomes?, Geo. Univ. McCourt Sch. of Pub. Pol'y Ctr. for Ret. Initiatives (Dec. 2022.

³ See Morningstar 2026 Retirement Plan Landscape Report.

⁴ See FASB 820, paragraph 820-10-35-54A.

⁵ We note, however, that in Example 3, the addition of the annuity component is not considered to be the creation of a new fund.

⁶ For example, while there may be scenarios where a plan fiduciary, consistent with the duty of prudence, determines it is appropriate to consider participant profiles or characteristics in selecting a plan investment, we do not believe these should be added as an additional stand-alone factor required to satisfy the safe harbor.

⁷ At the same time, we recommend the Department not opine in the final rule on the applicable pleading or motion to dismiss standard for ERISA fiduciary breach claims. This is a separate legal standard that implicates the Federal Rules of Civil Procedure and existing Supreme Court jurisprudence. While the pleading standard, including the requirement for an ERISA plaintiff to allege a “meaningful benchmark,” has a direct and meaningful impact on the ERISA litigation landscape, the Department should provide its views on that issue by submitting an amicus brief in Anderson v. Intel Corp. Investment Policy Comm., No. 25-498, that is consistent with the Department’s well-reasoned amicus brief in Parker-Hannifin Corp. v. Johnson, No. 24-1030.