DOL Proposes a Six-Factor Safe Harbor for Alternatives in Your 401(k)

The Department of Labor proposed a rule on March 30, 2026, that would give 401(k) plan sponsors a defined legal safe harbor for adding private equity, real estate, infrastructure and digital assets to workplace retirement menus. The proposal follows a 2025 executive order directing regulators to expand access to alternative assets in defined-contribution plans, and it responds to a longstanding complaint from plan sponsors: the fear of being sued for offering investments that are harder to value and less liquid than a traditional index fund.

What changed

Under the proposed rule, a fiduciary who documents that it "objectively, thoroughly, and analytically" evaluated six factors — expected performance, fees and expenses, liquidity, valuation methodology, benchmarking, and complexity — before selecting or retaining an alternative investment option would receive a legal presumption that it satisfied ERISA's prudence requirement. The Labor Department describes the factors as non-exhaustive, meaning fiduciaries may need to weigh other considerations too, and the safe harbor applies to investment selection generally, not only to alternatives, though it was drafted specifically to address the barriers sponsors cite when considering private equity, real estate and crypto. Brokerage windows, where individual participants pick their own investments outside the plan's core menu, are not covered.

The Labor Department's announcement points to more than 500 ERISA lawsuits filed since 2016 and over $1 billion in related settlements since 2020 as evidence of the litigation risk that has kept many plan committees from adding anything beyond mutual funds, target-date funds and index funds. A process-based safe harbor is meant to give sponsors a documented playbook that reduces, though does not eliminate, that exposure.

Who is affected

The rule is aimed at plan sponsors and the committees that select 401(k) investment menus, but the practical effect falls on participants — including highly compensated employees and business owners who max out 401(k) contributions and have historically been unable to access private equity or similar strategies inside a tax-deferred account. If plan sponsors respond by adding alternative-asset funds or target-date funds with an alternatives sleeve, higher earners with large account balances and long time horizons are the participants most likely to allocate to them. The comment period runs through June 1, 2026, and the rule is not final; large plan sponsors, recordkeepers and asset managers are expected to weigh in before any final version is issued, which the Labor Department has signaled could come by the end of 2026.

The after-tax math

The tax treatment of an alternative asset does not change based on where it sits — what changes is the account wrapper. Example: an executive holds $200,000 in a private equity fund inside a taxable brokerage account, where a $40,000 gain would be taxed at long-term capital gains rates (up to 20% federally, plus the 3.8% net investment income tax for high earners, and state tax on top). The same $40,000 gain earned inside a 401(k) is not taxed in the year it occurs; instead, the entire account balance is taxed as ordinary income when withdrawn in retirement, potentially at a higher or lower rate depending on the saver's bracket at that time. Illiquidity is the tradeoff largely unrelated to taxes: a private equity stake inside a 401(k) still cannot typically be sold on demand the way a mutual fund share can, and participants approaching retirement age would need to weigh whether an illiquid holding fits a plan that may require regular distributions once required minimum distribution age arrives.

What to watch

Because the rule is only proposed, no plan is required or even necessarily permitted to add alternatives immediately — recordkeeping systems, fee structures for illiquid assets, and valuation practices for a defined-contribution environment (where daily pricing is standard) all still need to be worked out. Employees whose plan sponsor is considering adding alternatives may want to ask about the specific vehicle (a fund-of-funds, a target-date fund sleeve, or a standalone option), its fee structure, and its liquidity terms before allocating, since fees on private-market vehicles are often several times higher than an index fund's. It may be worth discussing with a financial planner how any new alternative option would fit alongside existing retirement and taxable-account holdings once a plan actually adds one.

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