Alternatives in Target Date: What does the DOL say?

The Department of Labor's proposed rule signals a significant shift towards greater acceptance of alternative investments like private equity and credit within retirement plans, particularly target-date funds. This guidance provides a clearer framework for fiduciaries evaluating such options, moving away from a historically cautious stance to a more supportive one.

The rule emphasizes a robust process over specific outcomes, outlining six factors fiduciaries must consider. These include risk-adjusted performance, fees, liquidity, valuation, benchmarking, and complexity. While not eliminating litigation risk, adherence to this framework strengthens a fiduciary's position.

Key implications for target-date funds involve potential liquidity constraints, especially for CITs, possibly capping alternative allocations at 15% of illiquid assets. Additionally, the proposal favors a single, all-in fee structure, which could lead to higher disclosed fees as managers absorb performance fees. The final rule, expected by late 2026 or early 2027, will clarify the extent of flexibility for plan sponsors and fund providers.