ERISA Compliance Handbook for Asset Managers
VI. Evolving Legal Landscape for Plan Fiduciaries

Asset managers with discretionary authority over plan assets may encounter the issue of ESG considerations in at least three contexts:

1. The manager in the normal course is evaluating whether to purchase, hold or liquidate one or more investments for the portfolio and applies its methodology and criteria – which may or may not include assessment of the impact of ESG factors on the investment’s risks or returns according to its own policies and procedures.
2. The manager has constructed a portfolio in a pooled fund specifically designed to support one or more ESG-related outcomes while earning competitive returns, and it makes participation available to investors including, ERISA plans. Depending upon the level of Benefit Plan Investor participation, this fund may or may not hold plan assets subject to ERISA.
3. The manager is presented by a mandate from the appointing named fiduciary to consider (or not) various ESG-related factors as part of the overall investment policy of the plan and incorporated into the IMA.

In any of these situations, the manager should be aware of the fluid political and legal framework behind the DOL’s attempts to provide guidance and establish enforcement priorities with respect to the role of ESG factors in the construction of an ERISA plan’s portfolio.

As has been reiterated in several contexts, ERISA directs a plan fiduciary to discharge its duties “solely in the interest of participants and beneficiaries” and for “the exclusive purpose” of providing benefits and defraying the reasonable costs of administration. The question then becomes one of whether and how to regulate the types of factors that may or may not be taken into account in the context of portfolio construction.

In the context of ESG factors – the Department has struggled to deal with the varying philosophies of presidential administrations, legislative efforts and legal battles over what role ESG should play in plan investment decision-making. In recent years especially, the DOL has been unable to establish and maintain a consistent and coherent set of rules, leaving fiduciaries and their ERISA counsel in a bit of a vacuum.

As of the time of this publication, there are regulations (issued during the Biden administration in 2022) that allow for consideration of ESG factors and their economic effects under circumstances determined by a prudent fiduciary, but always subject to the overriding requirement that fiduciaries act in the plan’s best interest and not subordinate the interests of participants and beneficiaries to objectives unrelated to the provision of retirement benefits. However, these regulations have been the subject of ongoing litigation brought by a coalition of Republican state attorneys general in early 2023. Despite being upheld twice at the district court level in the last couple years, the DOL recently announced that it would cease defending the regulations in the plaintiffs’ appeal in the U.S. Court of Appeals for the Fifth Circuit, and it will instead promulgate a new set of rules in 2026.

Notwithstanding this regulatory uncertainty, investment managers, as well as those who appoint the managers and develop investment policies, are for the moment left with the core statutory principles relating to investment selection, taking into consideration the financial implications of any factor or characteristic of a potential or current investment the manager in its prudent judgment thinks applicable, including one or more ESG factors.

The adage, “prudence is process,” is particularly relevant in this context, including, contemporaneous and thorough documentation of the evaluation, selection and monitoring phases of plan asset management.

Governmental plans are exempt from Title I of ERISA and instead, their fiduciary standards arise from state constitutions, statutes, common law (e.g., prudent investor standards) and investment policies.  Despite the different sources of authority, the fiduciary standards that apply to these plans generally echo ERISA’s core principles of prudence and loyalty.  Given the similar (and in many cases, identical) terminology, investment managers have historically construed the rules that govern public plans by applying the same interpretations that the DOL has issued under ERISA over the years.  More recently however, many state and local governments have begun articulating their own standards of what it means to be a fiduciary overseeing public pension assets, especially when it comes to the role of ESG in plan investments (for a more general discussion of the role of ESG for ERISA plans, see ESG).

The significance of this shift is that the protocols that managers have built for their ERISA clients may require tailoring for the labyrinth of state laws and guidance that come into play when accepting governmental plan mandates. For instance, while a manager’s investment methodology should be grounded in financial risk‑return analyses for either context, public plans may direct or constrain certain asset classes, divestment targets or ESG approaches.  Additionally, where ERISA emphasizes a uniform best‑interest standard to protect participants and beneficiaries, public plans may face statutory exclusions or priorities that can shape manager selection and portfolio composition. 

As discussed throughout this Handbook, the ERISA regime is highly prescriptive and its policy of preemption means that ERISA strives to create uniform standards for covered plans and their fiduciaries.  Said differently, managing ERISA plan assets is centered on rigorous prohibited transaction compliance, documentation of investment process and diversification, managing “plan asset” status in pooled funds and deploying exemptions such as the QPAM exemption.  But when it comes to transacting with governmental plans, managers will often find that there is more room for negotiation with officials who oversee these plans, since they often have greater flexibility to work with the manager than an ERISA investor would have under similar circumstances. 

Nonetheless, many governmental plans will seek “ERISA-like” treatment through side letters and fund-level covenants even though the plan is not treated as a Benefit Plan Investor for purposes of ERISA’s plan asset rules.  A side letter does not, by itself, trigger ERISA fiduciary status or prohibited transaction obligations that would otherwise not apply.  As a practical matter, when a manager is dealing with a governmental plan that is seeking ERISA-like status, some measures the manager can take include:

• Agreeing to satisfy ERISA-like standards of care (e.g., incorporating the prudence standard set forth in ERISA Section 404(a)(1));
• Offering appropriate ERISA-style protections and reporting by contract without converting fund assets into ERISA plan assets;
• Maintaining robust pay-to-play, placement agent, conflicts and expense policies that would be suitable for public plan investors; and
• Being able to accommodate to any state-specific requirements (such as ESG investment considerations or restrictions) that are applicable to public plans.

Finally, given the prominence of the ESG issue for governmental plans in recent years, managers should keep in mind the following considerations when it comes to marketing to these plans and investing on their behalf:

• Be measured and careful in communications – It is critically important for managers to be very measured and careful when speaking with public officials. All communications—whether written or oral—must be accurate, precise and consistent with statements being made to other investors. For instance, if a manager takes into account ESG considerations as part of an integration strategy, it is important that the manager not overstate that detail and make it the focus of its communications with the plan fiduciaries or other state/local officials. At the same time however, the manager should not understate the role ESG factors play in its investment process. Caution, care and moderation will best ensure that the manager can continue to work with a diverse range of investors.
• Be thoughtful when responding to state inquiries – Even if they seem innocuous, communications between managers and state/local officials could be used as the basis for a determination or allegation that a manager is not acting consistently with its fiduciary duties. Communications also could be viewed as a basis for inclusion on that or another state’s restricted list. It is important to remember that when dealing with state/local governments, open public records laws (similar to FOIA in the federal context) are always at play. Managers can never assume that anything being communicated to state officials or employees (whether it is oral or written) will remain confidential. Said differently, managers need to align their private and public messaging and ensure that whatever is said to one state/municipality would be okay for the entire investor base to hear as well.
• Know what your contracts require – As mentioned above, state and local laws regulating the fiduciaries of public retirement systems have historically tracked ERISA and the DOL’s interpretations thereunder. Consequently, a fund’s investment documentation with a governmental plan would often include an agreement that the governmental plan would be treated as an ERISA partner, in order to ensure that it would be getting the highest level of fiduciary protection under U.S. law. However, managers need to make sure that they understand the precise parameters of that commitment, and ensure that they can actually comply, and are complying, with the various state and local laws in the event those laws deviate from the federal standards under ERISA.

As a practical matter this Handbook addresses the ERISA issues commonly faced by asset managers who have been appointed to manage a portion of defined benefit pension assets or other pools in which plans and plan participants have an undivided interest. There are also scenarios where an investment adviser acts in a fiduciary role with respect to a 401(k) or other individual account plan, for example by:

• providing discretionary or nondiscretionary advice with respect to the selection and monitoring of investment options (typically mutual funds, CITs and other pools sponsored by a third party) to which participants may direct their accounts;
• constructing and monitoring a pool of assets that serves as an investment choice (or part of an investment choice) on the 401(k) plan menu (e.g. for a plan with scale that wishes to include custom portfolios in lieu of or in addition to mutual funds as part of the menu);
• providing nondiscretionary investment advice directly to participants with respect to the investment of their accounts among the plan options provided;
• accepting discretionary control over a participant’s account and allocating the account across the available investment options; and/or
• serving as an independent fiduciary over a pool primarily comprised of employer securities (i.e., a company stock fund) with discretion to maintain, diversify or liquidate the fund.

In any one or more of these situations, the adviser may wish to be cognizant of some additional rules under ERISA that apply to 401(k) plans as opposed to defined benefit plans. These include:

• Certain conflicts of interest. In the context of 401(k) plans, there may be situations where an adviser, or an employee or agent of an adviser, is providing advice to one or more participants with respect to allocation of their 401(k) account among the investment alternatives and/or advice in connection with withdrawals such as rollovers. There are also circumstances where a person is providing advice with respect to investments in an IRA—most of which are not subject to ERISA, but still subject to a subset of similar rules under the Code.
  • Where the person is affiliated with one or more investment alternatives or the IRA sponsor/custodian, conflicts of interest could occur to the extent that the person or its affiliate earns additional fees as a result of the recommended investment. There are also situations where an investment firm may offer to buy or sell a security directly to the 401(k) plan or IRA, or match purchases and sales amongst its 401(k) or IRA customers.
  • The threshold question in these situations is whether the person or firm providing the recommendations is a fiduciary under ERISA (or the Code, in the case of an IRA).
  • While an investment adviser hired by a plan to provide ongoing discretionary authority over plan assets is unquestionably an ERISA fiduciary, questions arise as to whether advice is considered fiduciary in nature under the DOL’s longstanding definition of “investment advice” that contemplates the receipt of a direct or indirect fee, and that the advice be provided on a regular basis and pursuant to a mutual agreement or understanding that individualized advice will be a primary basis for investment decisions. This is known as the “five-part test” and was developed well before the proliferation of participant-directed 401(k) plans and IRA rollovers to identify when nondiscretionary advice should be subject to ERISA’s fiduciary standards.
  • With the growth of the “retail” 401(k)/IRA advisory industry and asset base, the DOL has made attempts to more clearly bring this type of activity under its jurisdiction. As with issues like ESG, alternative investments and proxy voting, guidance with respect to this issue has been and remains a fluid and evolving matter affected by views of various presidential administrations.
  • The Department’s first attempt during the Obama administration was to replace the five-part test with a broader definition of “investment advice” that would include much of the activity described above provided by “advice fiduciaries.” This regulation was subsequently invalidated by the courts and withdrawn. More recently during the Biden administration, the Department issued another regulation that retained the five-part test but expanded the scope of “regular advice” so as to more clearly include these “advice fiduciaries” as subject to the prohibited transaction and conflict of interest rules. That release included a class exemption (PTE 2020-02), which provided a pathway for advice fiduciaries to advise clients with respect to products and funds in which they may have an interest that might affect their best judgment, and be compensated by the funds, their sponsors or affiliates. The key criteria for exemptive relief is the advice fiduciary’s obligation to make recommendations under impartial conduct standards, which include providing advice in the best interest of the participants. These regulations were finalized in 2024, along with an amended PTE 2020-02 and clarifying amendments to other exemptions. Shortly before the amendments were scheduled to take effect on September 23, 2024, two Texas district courts issued nationwide stays, and in late November 2025, Fifth Circuit granted the DOL’s unopposed motion to dismiss its appeal, in which the Biden administration had sought to revive the 2024 regulations and exemption amendments. According to its Spring 2025 regulatory agenda, the Department intends to issue a new final rule by May 2026 that will “ensure the regulation is based on the best reading of the statute,” and that will be responsive to an executive order calling on federal agencies to deregulate.
  • As a practical matter, advisers who work with 401(k) plan participants and IRA owners are left to either (a) refine and restrict activities and communications so as not to be deemed to render “investment advice” under the current five-part test (thus avoiding fiduciary status) and/or (b) adhering to the standards and procedural requirements of PTE 2020-02 (as in effect prior to the 2024 amendments). 
• Certain Principal Transactions. PTE 2020-02 allows for certain transactions involving a 401(k) or IRA account and its sponsoring financial institution. The exemption allows for both “covered principal transactions” and “riskless principal transactions” under the conditions and conduct standards set forth in the exemption. A “covered principal transaction” is a purchase by the financial institution from a 401(k) account or IRA, or any sale to the 401(k) account or IRA of a publicly offered U.S. corporate debt securities, U.S. Treasury securities, debt securities issued or guaranteed by a U.S. federal government agency other than the U.S. Treasury, debt securities issued or guaranteed by a government-sponsored enterprise, municipal securities, certificates of deposit and interests in Unit Investment Trusts. Covered principal transactions may be the result of a recommendation from the financial institution or its representative. A “riskless principal transaction” is a transaction in which a financial institution, after having received an order from a 401(k) or IRA account holder to buy or sell an investment product, purchases or sells the same investment product in a contemporaneous transaction for the financial institution’s own account to offset the transaction with the individual investor. Principal transactions that are not riskless and that do not fall within the definition of covered principal transaction are not covered by PTE 2020-02.
• ESG considerations. The lack of clarity discussed in ESG regarding the role of ESG factors investing also applies to the construction of an investment menu under a 401(k) plan, largely in the context of whether to designate one or more ESG-focused investment funds on the menu for participant direction. ESG factoring may also arise when designating a default option for 401(k) investments or when constructing a proprietary asset pool as an option for a larger 401(k) plan with scale. Plan fiduciaries and those that advise them should consult with ERISA counsel on this topic and, document the process and rationale for ESG funds (as they should for any fund addition or removal).
• Cryptocurrency. 401(k) product vendors are working to facilitate the availability of cryptocurrency and related assets as an investment option. In 2022, the DOL issued sub-regulatory guidance, which expressed concern that this new asset class might not be prudent as an investment option for individual account plans such as 401(k)s, and among other things, the guidance directed plan fiduciaries to exercise “extreme care” before they considered adding a cryptocurrency option to a 401(k) plan’s investment menu, and warned of DOL enforcement actions where cryptocurrency was made available. In May 2025, the DOL rescinded that guidance and reiterated that it was restoring its historically “neutral approach” – neither endorsing nor disapproving of any particular asset category and leaving it to plan fiduciaries to decide the extent to which cryptocurrency might be available.
• Other alternative investments. Private equity and hedge fund sponsors have long sought viable ways to provide 401(k) participants exposure to these so-called “alternative investments” which often comprise a material portion of a defined benefit plan portfolio. Challenges in this area include: liquidity, valuation, fees, diversification and access for investors who are not “accredited” under federal securities laws.
  • In 2020, the DOL issued an information letter that clarified its views on incorporating private equity as part of a broader diversified investment option for defined contribution plans. The guidance demonstrated the DOL’s recognition of the role that private equity and other alternative asset classes can play for participants by enhancing diversification of investment risk, facilitating potentially greater returns and providing investment options whose performance may be less correlated to the traditional options available to plan participants. According to the guidance, a plan fiduciary would not violate its ERISA duties solely by offering target-date funds and other professionally managed asset allocation funds with a private equity component as a designated investment alternative for the plan, as long as appropriate care was taken.
  • A year later, the DOL issued a supplemental statement that left in place the 2020 guidance but also warned of misreading it as an endorsement of the idea that incorporating private equity or other alternative investments in a typical 401(k) plan would generally be appropriate. The supplement focused on the applicability of the prior guidance to smaller plans and their fiduciaries, and it emphasized how plan fiduciaries selecting products that include private equity need to have the particular skills, knowledge and experience to evaluate the performance and fees of the underlying private fund portfolio.
  • In August 2025, President Trump issued an executive order that marked a significant regulatory shift, by calling for an expansion of the types of investment options available to 401(k) participants, including, “alternative assets.” The executive order directs the DOL to clarify fiduciary duties under ERISA, propose new rules or safe harbors and prioritize actions to curb ERISA litigation that might constrain a plan fiduciary’s ability to offer a more diverse range of investment options to plan participants, including alternative investments. There is also a call for collaboration between the DOL, the Treasury Department and the U.S. Securities and Exchange Commission to facilitate broader access, including, possible changes to accredited investor definitions.
    • According to the executive order, “alternative assets” includes: private equity, direct and indirect investments in real estate, investment vehicles that hold digital assets, commodities, infrastructure development projects and lifetime income investment strategies including longevity risk-sharing pools. While the executive order enumerates this wide array of investment categories as qualifying as alternative assets; it also envisions that exposure will be facilitated via asset allocation funds (such as CIT TDFs).
    • Shortly after the executive order came out, the DOL rescinded its 2021 supplement because it was construed by many in the industry as the DOL expressing skepticism that 401(k) plan fiduciaries may not be well-suited to evaluate alternative assets such as private funds.

• IRA investments in private funds. It is not unusual for an investor to request to invest in a privately placed hedge fund, private equity fund or even a real estate fund using his or her self-directed IRA – often a “rollover” IRA of substantial size that supports either “qualified purchaser” or “accredited investor” status. As described above, IRAs are Benefit Plan Investors and must be taken into account as such when determining if Benefit Plan Investor participation is significant. A fund sponsor/GP should also consider the following items appurtenant to IRA investment in its funds:
  • Many commonly-recognized retail IRA custodians are not set up for or will otherwise not agree to custody assets invested in a private fund. Those that do agree (certain private banking or similar trust companies) will often exercise their own due diligence on fund documentation and terms. The “investor” from the fund’s perspective for purposes of reporting, amendments, side letters and the like is the IRA custodian, who will generally act as directed by the IRA owner but not necessarily in all cases as a matter of its own risk management. In accordance with qualifications set forth in the Code, IRAs must allow owners to withdraw from the account at any time (albeit in certain cases subject to early withdrawal penalties). As a practical matter, in the absence of immediate liquidity, an IRA owner may request the distribution of the partnership interest directly. This would also be the case with respect to IRA beneficiaries in the event of the IRA owner’s death.
  • For a fund expecting to call capital in stages over a period of time, it is imperative that the IRA owner maintain suitable liquidity in the IRA. Funding capital with personal funds when the IRA is the limited partner can disqualify the IRA and lead to complications a fund sponsor would generally wish to avoid.
  • The above issues may warrant additional consideration in the context of employees of a fund sponsor using IRAs for investment. For example, where a fund retains the right to redeem a former employee or limit additional transfers, or when personal co-investment obligations are potentially satisfied with IRA investments, or employees wish to invest IRAs in carried interest vehicles – additional risks and burdens on the GP/fund may ensue and should be discussed with ERISA counsel.
• Cybersecurity. The DOL guidance regarding cybersecurity policies discussed at Cybersecurity contains additional expectations for service providers in the 401(k) space and information intended to be shared with participants to better protect the security of their account information.
• Employer Securities. In the case of an individual account plan such as a 401(k), the rule which limits employer securities (together with employer real property) to a maximum of 10% of plan assets does not apply. This allows for 401(k) plans to have an investment option made up primarily of employer stock. While a plan sponsor may design a plan to require matching and other company contributions to be held in employer stock, a participant may only voluntarily invest his or her 401(k) contributions in employer stock.
• Compensation-related disclosures. In addition to the disclosures discussed in Reporting and Disclosure, managers of products in a 401(k) plan will need to provide certain performance,compensation and expense ratio information in support of the plan’s obligation to provide information about the plan’s investment options directly to participants.