The Investment Selection Rule: Clarity That Strengthens Fiduciary Conviction

The goal of any retirement solution is to support long‑term retirement income outcomes for participants. That principle has anchored this series (see “Series in brief” sidebar) from the outset, challenging the industry to reconsider default assumptions and evaluate private markets in defined contribution (DC) plans through a disciplined, participant‑first framework.

With the release of the Department of Labor’s (DOL) proposed updates to “Fiduciary Duties in Selecting Designated Investment Alternatives” (the “Investment Selection Rule”)ⁱ, the evaluative framework governing investment selection in participant‑directed DC plans has been clarified. The proposal addresses how fiduciaries assess designated investment alternatives—the investment options selected by plan fiduciaries and made available to participants—by reaffirming a process‑based approach grounded in ERISA’s long‑standing principles of prudence, context, and portfolio‑level analysis. In this final paper, we examine what the proposed guidance does and does not change, why it is rooted in first principles of fiduciary law and likely to endure across administrations, and how it reframes fiduciary evaluation of investment options in a modern DC environment.

Over the past two decades, fiduciaries overseeing DC plans have had to balance a range of considerations, including regulatory uncertainty, operational constraints, participant outcomes, and the growing influence of a small number of high‑profile fiduciary cases. In practice, these forces often encouraged a preference for investment choices perceived as defensible in a litigation-conscious environment, sometimes at the expense of broader diversification or long‑term outcomes. The proposed rule provides important clarity on how those tradeoffs should be evaluated going forward.

Against that backdrop, the most important question is how the proposed Investment Selection Rule clarifies fiduciary evaluation in practice. Significantly, the proposal does not introduce new fiduciary duties, mandate specific investments, or endorse particular asset classes. Instead, it articulates a process‑based, asset‑neutral framework for evaluating designated investment alternatives grounded in ERISA’s long‑standing principles of prudence, context, and portfolio‑level analysis. With that evaluative framework established (summarized in the Investment Selection Rule summary sidebar), the key issue becomes what the proposed guidance does and does not change for fiduciaries navigating today’s DC environment.

Why this guidance was needed

To interpret the Investment Selection Rule appropriately, it is important to understand the environment in which fiduciaries have been operating. The guidance does not emerge in a vacuum; it responds to structural, legal, and behavioral dynamics that shaped how investment decisions were made in practice, often in ways that prioritized defensibility over long‑term outcomes.

Over the past two decades, litigation risk—or the perception of litigation risk—has been a powerful factor behind constraining innovation in DC plan design. Since 2016, plan sponsors have faced hundreds of excessive fee and imprudent investment lawsuits, with the majority tied to 401(k) plans (Exhibit 1).ⁱⁱⁱ Because those cases are highly visible and often costly, plan sponsors openly acknowledge this litigation risk has had a negative impact on plan innovation and design.^iv

Empirical research reinforces this dynamic. An analysis of more than 35,000 employee retirement plans, representing over $5 trillion in assets, indicates that plans most exposed to ERISA litigation are 2%–3% less likely to include a given asset class in their investment menus.v That same research estimates that excluding these asset classes reduced participants’ retirement wealth by 9%–14%. Together, these findings suggest that a system designed to protect participants may have unintentionally constrained the long‑term outcomes it was intended to support.

At the same time, the structure and governance of DC plans were evolving in ways that challenged prevailing default approaches. The modern DC landscape was fundamentally reshaped by the Pension Protection Act (PPA) of 2006.^vi Prior to the PPA, auto‑enrollment and diversified default options were uncommon, and many plans defaulted participants into capital‑preservation vehicles due to concerns about fiduciary exposure if participants experienced losses.

By designating target‑date funds (TDFs) as qualified default investment alternatives (QDIAs) and encouraging auto‑enrollment, the PPA marked a shift away from defaults shaped primarily by perceived fiduciary defensibility toward approaches grounded in diversification, professional management, and long‑term outcomes.^vii Although QDIAs are now a common category of designated investment alternatives used when participants do not make an affirmative election, their adoption was initially controversial. Critics argued that defaulting participants into professionally managed, equity‑exposed portfolios reduced individual choice, imposed one‑size‑fits‑all solutions, and exposed participants—and fiduciaries—to the possibility of market losses.

With the benefit of hindsight, those concerns have largely proved unfounded. As illustrated in Exhibit 2, nearly half of DC participants in 2005 were invested either in highly concentrated company stock or in very conservative fixed income and money market funds—allocations that exposed participants to either outsized risk or chronically low returns.^{viii ix} By 2024, these high‑risk and low‑return allocations had moved to the margins, while nearly 80% of participants were invested in diversified, balanced strategies. This shift reflects not a reduction in choice, but an evolution in plan design that better aligns investment structure, governance, and participant outcomes.

Over the same period, DC plan features continued to evolve. Auto‑enrollment expanded significantly (Exhibit 3, left), professionally managed accounts gained traction (Exhibit 3, right), QDIAs broadened to include collective investment trusts (CITs), auto‑enrollment gave rise to auto‑escalation, and plan lineups expanded to include additional tools such as self‑directed brokerage windows. These developments reflect a DC system that is materially more sophisticated, operationally and from a governance perspective, than it was two decades ago.

This evolution has not occurred at the expense of fiduciary oversight, though. Today’s DC plans are better equipped to evaluate, implement, and monitor a wider range of investment structures than they were pre‑PPA. Fiduciaries continue to assess plan demographics, governance capabilities, and participant needs when determining whether particular investment approaches are appropriate. In some cases, zero allocation to some strategies may be the right choice, but it cannot be the default based on assumption of complexity alone.

Participant expectations have also evolved alongside these structural changes. While a “set‑it‑and‑forget‑it” approach remains appropriate for many participants, it no longer reflects the full range of behaviors observed in today’s DC system. Participants are often described as falling into one of two categories—those who want investment decisions made for them and those who prefer to manage their own portfolios—but in practice, those preferences are not static.

As participants age, balances grow, household finances become more complex, and confidence increases; investment behavior often evolves. Many participants who begin their careers invested entirely in target‑date funds gradually supplement that default allocation with additional “do‑it‑yourself” choices, including core menu options or brokerage windows, while still retaining a professionally managed foundation. Investment needs and engagement tend to change along the glidepath of an investor’s lifecycle, rather than following a single, permanent path.

Recent survey data reflect this growing desire for involvement. More than 70% of DC participants want some level of involvement in retirement investment decisions.^x Many— particularly Millennials and Gen X — report familiarity with private market investments and believe they should at least be considered within long‑horizon retirement portfolios (Exhibit 4).

These preferences are consistent with broader research on retirement outcomes. Studies examining “401(k) millionaires,” alongside coverage of record‑high participant balances, highlight a consistent set of behaviors: early and sustained participation, relatively high contribution rates (often in the low‑ to mid‑teens), and diversified asset allocations maintained over long horizons.^xi At the same time, over half of recent retirees express regret about their accumulation phase strategy, citing not starting early and not contributing enough to retirement as the two biggest reasons for their sentiment.^xii

Taken together, these dynamics created the need for clearer guidance on how fiduciaries should apply ERISA’s principles in a modern context, setting the stage for the clarification provided by the Investment Selection Rule.

A return to first principles

The Investment Selection Rule fits squarely within the broader evolution of DC plans. The PPA recognized that defaults, diversification, and professional management could improve participant outcomes when thoughtfully implemented. The proposed rule builds on that foundation by clarifying how fiduciaries should evaluate increasingly sophisticated investment solutions within participant‑directed plans. It reflects a DC framework that has moved beyond simple choice architecture toward one centered on outcomes, grounded in ERISA’s core principles of prudence and fiduciary discretion.

At its foundation, ERISA has always emphasized process over prediction. It does not demand risk avoidance or market foresight; it requires a prudent, well‑documented decision‑making process grounded in the facts and circumstances of each plan. The Investment Selection Rule reinforces this approach by clarifying how those principles apply as DC plans, investment vehicles, and participant needs have evolved.

A defining feature of the proposed framework is its asset neutrality. The factors emphasized in the rule—expected risk‑adjusted returns over appropriate time horizons, fees in relation to value, liquidity aligned with plan needs, valuation, benchmarking, and fiduciary expertise—apply broadly to designated investment alternatives, including asset‑allocation vehicles such as TDFs. This aligns regulatory guidance with how fiduciaries already evaluate widely used DC structures and extends that same evaluative discipline across a broader set of potential investments.

The rule also moves fiduciary evaluation away from assessing investment characteristics in isolation. As DC plans have shifted from self‑directed menus toward professionally managed portfolios, evaluation has increasingly occurred at the portfolio level, where diversification, time horizon, liquidity management, and participant behavior intersect. By framing prudence in context rather than relying on categorical assumptions about complexity, structure or cost, the Investment Selection Rule brings regulatory clarity to how modern DC plans are designed and managed.

The durability of this guidance stems from that same first‑principles approach. Rather than relying on informal statements or narrow interpretations, the DOL has proposed a formal notice‑and‑comment regulation anchored in ERISA’s statutory text and longstanding interpretive history. By emphasizing prudence, process, and fiduciary discretion, rather than endorsing or discouraging particular investments, the rule establishes a framework that is both flexible and resilient. Meaningful reversal would likely involve a departure from ERISA’s foundational concepts, rather than a change in policy emphasis alone.

Applying the framework

Across this series, we have argued for a more deliberate, outcome‑oriented approach to DC plan design—one that moves beyond default assumptions and evaluates investment solutions through the lens of participant needs, fiduciary process, and long‑term retirement outcomes. Each installment addressed a different dimension of that challenge: questioning zero allocation as a default, clarifying the role of liquidity, reinforcing the centrality of fiduciary process, and now situating the Investment Selection Rule within the broader evolution of the DC system.

The proposed guidance brings needed clarity to how fiduciaries should approach investment evaluation in practice. It does not mandate change, nor does it prescribe specific solutions. Instead, it articulates a principles‑based, asset‑neutral framework that aligns regulatory expectations with how modern DC plans are designed, governed, and managed. By grounding fiduciary evaluation in process, documentation, and portfolio context, the rule reinforces long‑standing ERISA principles while providing greater confidence for fiduciaries navigating an increasingly complex investment landscape.

Importantly, this clarification arrives at a moment when DC plans are better equipped—operationally, structurally, and from a governance perspective—to apply it thoughtfully. The question for fiduciaries is no longer whether complexity should be avoided by default, but how different investment approaches should be evaluated in light of plan design, participant demographics, and long‑term objectives. In some cases, maintaining existing structures may remain appropriate. In others, thoughtful change may be warranted. The proposed framework supports both outcomes, provided the decision is grounded in a prudent and well‑documented process.

As the DOL’s proposal moves through the notice‑and‑comment process, fiduciaries and industry participants have an opportunity to engage constructively, drawing on experience, evidence, and first principles to help shape guidance that reflects the realities of today’s DC system. With greater clarity now in place, the conversation can move from whether fiduciaries can engage to how they should engage. What remains is a collective challenge: to apply education, diligence, and prudent judgment in a way that meaningfully improves long‑term retirement outcomes for participants.