Behind tens of thousands of suspicious form letters, serious academics, regulators and investor advocates exposed the fatal weaknesses in the Department of Labor’s private-equity safe harbor

By Christopher Tobe

The Department of Labor received more than 46,000 public submissions on its proposal to help Wall Street push private equity, private credit, cryptocurrency and other alternative investments into 401(k) plans.

That sounds like an extraordinary public debate. It was not.

The docket was flooded with mass-produced letters—including supposedly pro-private-equity comments attributed to dead people and people who said they never submitted them. Bloomberg data scientists helped expose what appears to be one of the ugliest astroturfing campaigns ever directed at a retirement regulation.

I previously wrote about that scandal in “Dead People for Private Equity?”.

But underneath this contaminated mountain of manufactured support was a much smaller group of serious comments from academics, researchers, securities regulators, investor advocates and investment professionals.

I reviewed those comments in a new 55-page report. The most important conclusion is simple:

The people who actually understand private-market valuation, liquidity, fees and fiduciary law gave the Labor Department powerful reasons not to create this private-equity safe harbor.

Their objections go far beyond the usual warnings about high fees and illiquidity. They show that the Department’s proposed six-factor fiduciary test can be manipulated into a compliance exercise that looks rigorous on paper while relying on numbers supplied by the private-equity industry itself.

A Safe Harbor for Wall Street

The Labor Department’s March 2026 proposal is misleadingly presented as “asset neutral.”

The proposed rule says fiduciaries should examine six factors when selecting investment alternatives:

1. Performance
2. Fees
3. Liquidity
4. Valuation
5. Benchmarks
6. Complexity

Those are sensible words. The problem is what DOL attaches to them.

A fiduciary that documents an “objective, thorough, and analytical” consideration of the factors could receive a presumption of prudence and substantial deference in court.

That is not neutrality. It changes the legal terrain in favor of plan sponsors, consultants, recordkeepers and investment managers.

DOL openly says one purpose of the rule is to reduce fiduciary litigation. Its economic analysis estimates hundreds of millions of dollars in purported savings from reducing the time plans and service providers spend discussing litigation risk.

But DOL treats litigation almost entirely as a cost. It does not adequately count the benefits of litigation:

• Recovery of excessive fees and investment losses
• Deterrence of self-dealing
• Removal of imprudent investments
• Improved investment menus
• Exposure of hidden compensation
• Better fiduciary monitoring
• Discovery of documents that participants could never obtain independently

The proposal effectively assigns a dollar value to protecting fiduciaries from lawsuits while assigning little or no value to protecting workers from fiduciary misconduct.

That is not a serious cost-benefit analysis. It is a Wall Street wish list dressed up as economics.

Six Factors—But Often Only One Bad Number

The most important technical comment may have come from the EDHEC Infrastructure & Private Assets Research Institute.

EDHEC exposed a fundamental weakness in DOL’s six-factor framework: the factors are not independent.

Private-equity managers typically value their own holdings through periodic appraisals. Those manager-controlled net asset values, or NAVs, then flow through several parts of the fiduciary analysis.

The same smoothed NAVs can be used to claim:

• Low volatility
• Small drawdowns
• Low correlation with public stocks
• Attractive risk-adjusted returns
• Diversification benefits
• Stable valuations
• Superior performance against private-market benchmarks

Six supposedly separate tests may therefore depend on one stale and potentially biased valuation stream.

That is not six-factor due diligence. It is the same questionable number wearing six different costumes.

EDHEC pointed out that appraisal smoothing can make private assets appear much safer than publicly traded investments. Public stocks are repriced every trading day. Private assets may retain old valuations for months, even when comparable public companies are collapsing.

During a market crisis, a public-equity index may immediately show a 20% decline while private equity reports a much smaller loss. That does not necessarily mean private equity protected investors. It may mean that private-equity managers did not mark their holdings down quickly enough.

The Labor Department nevertheless presents comparisons of public-market and private-market drawdowns that could lead fiduciaries to confuse stale prices with safety.

A low reported standard deviation is not proof of low economic risk. A high Sharpe ratio calculated from smoothed returns is not proof of superior risk-adjusted performance. A low correlation created by delayed valuations is not true diversification.

Sometimes the apparent stability of private equity is simply the absence of an honest market price.

Valuation “Independence” Is Not Enough

DOL emphasizes independent valuation processes. EDHEC correctly explained why that is inadequate.

A valuation can be procedurally independent and still be economically wrong.

Fiduciaries need more than a representation that somebody followed an ASC 820 process. At a minimum, they should receive:

• The important valuation assumptions
• The discount rates and exit multiples
• The comparable companies used
• A sensitivity analysis
• A reasonable valuation range
• Explanations for manager overrides
• Comparisons between prior valuations and realized sale prices
• Secondary-market bids or discounts when available

A valuation of $100 million is not meaningful if a modest change in the discount rate produces a value of $75 million.

Private-equity valuations should not be treated as single, precise numbers. They are estimates with uncertainty ranges. That uncertainty affects performance, risk, fees, participant transactions and every benchmark built from NAVs.

The Benchmark Can Repeat the Same Lie

The proposed rule requires a “meaningful benchmark,” but private-equity benchmarking is notoriously vulnerable to manipulation.

A manager can choose among:

• The S&P 500
• The Russell 2000
• The S&P 600
• MSCI ACWI
• A private-equity peer index
• A custom blended benchmark
• One of several public-market-equivalent methodologies

Each choice can produce a materially different answer.

A private-equity benchmark derived from other private-equity NAVs may simply compare one set of questionable valuations with another. It can tell a fiduciary that the manager is marking assets consistently with its peers. It cannot necessarily tell the fiduciary whether those marks reflect economic reality.

Fiduciaries should be required to calculate public-market equivalents using multiple disclosed, investable indices. They should also explain why the selected benchmark reflects the size, geography, leverage and industry exposure of the underlying portfolio.

A custom benchmark should never qualify as “meaningful” merely because a consultant helped construct it.

As I have repeatedly documented in public pensions, custom benchmarks can become slow rabbits designed to be beaten.

NASAA Questions Whether DOL Can Invent a Presumption of Prudence

The North American Securities Administrators Association, representing state and provincial securities regulators, raised an equally important legal objection.

NASAA questioned whether a regulatory presumption of prudence is consistent with ERISA.

The Supreme Court rejected a special presumption of prudence for employee-stock-ownership-plan fiduciaries in Fifth Third Bancorp v. Dudenhoeffer. ERISA did not contain that presumption, so the Court refused to create it.

DOL now appears to be attempting something similar through regulation.

NASAA also correctly warned that merely considering the six factors cannot guarantee a prudent decision. A fiduciary could review all six, misunderstand the evidence and still select an imprudent investment.

Process matters, but ERISA does not say that any decision reached after completing a checklist must be presumed prudent.

If DOL retains any safe harbor, it should require contemporaneous written records showing:

• The actual information reviewed
• The alternatives considered
• Contradictory evidence
• The fiduciary’s independent analysis
• Quantitative acceptance and rejection thresholds
• The reason the final decision followed from the evidence

Consultant presentations and manager representations should not be enough.

Any presumption must also be explicitly rebuttable. Otherwise, DOL could immunize a facially unreasonable decision simply because the fiduciary assembled the right paperwork.

Participants Are Not Institutional Investors

The CFA Institute attacked the false “democratization” narrative from another direction.

Large institutions can negotiate lower fees, obtain side letters, demand reporting, select experienced managers, control commitment pacing and sometimes obtain seats on advisory committees.

Ordinary 401(k) participants control none of those things.

They cannot choose:

• The private-equity manager
• The underlying partnerships
• The individual deals
• The valuation methodology
• The liquidity terms
• The fee offsets
• The leverage
• The continuation-vehicle transactions
• The timing of capital commitments
• The investment’s eventual exit

Workers may not even know that private equity has been placed inside their target-date fund.

The correct comparison is therefore not between an institutional private-equity index and the S&P 500.

The fiduciary must examine the actual product offered to the plan after every additional layer:

• Underlying partnership fees
• Carried interest
• Fund-of-funds expenses
• CIT or pooled-fund charges
• Valuation expenses
• Liquidity-reserve drag
• Adviser fees
• Recordkeeping fees
• Borrowing costs
• Related-party charges

By the time a private-equity product reaches a 401(k), workers may receive second-tier access at first-class prices.

That is not democratization. It is distribution.

Fake Liquidity Can Become a Run on the Fund

Several commenters focused on interval funds and evergreen vehicles that offer periodic redemptions while holding assets that may take years to sell.

A quarterly redemption window does not make private equity liquid.

Withdrawals may be funded through:

• Cash reserves
• New participant contributions
• Borrowing
• Sales of the most liquid investments
• Delayed redemptions
• Gates
• Queues
• Manager discretion

Early redeemers may leave remaining participants with more leverage, fewer liquid assets and a weaker portfolio.

This is especially dangerous in 401(k) plans because participant cash flows are not optional. Workers retire, change jobs, take hardship withdrawals and roll over their accounts. Employers conduct layoffs. Plans terminate. Recordkeepers change.

Liquidity analysis must examine what happens when market stress and participant withdrawals occur simultaneously.

It must also address how a plan removes an imprudent private-equity option. If the investment cannot be sold for years, the fiduciary may discover that it has no practical ability to satisfy its continuing duty to monitor and remove the investment.

The exit plan must be written before the investment is made.

Target-Date Funds Can Hide the Risk

Wall Street’s preferred route into 401(k) plans is not likely to be a stand-alone private-equity fund. It will be a private-equity sleeve buried inside a target-date fund, managed account or white-label allocation fund.

That makes the problem more serious.

Target-date funds are frequently the plan’s qualified default investment alternative. Participants can be placed into them without affirmatively selecting the investment.

The wrapper does not eliminate the underlying opacity. It can hide it behind a simple year—2035, 2045 or 2055.

The private-equity industry will argue that professional management solves the complexity problem. In reality, professional management can transfer the decision away from the participant while preserving every underlying fee, valuation and liquidity problem.

A professionally managed black box is still a black box.

The DOL Should Listen to the Real Comments

The serious opposition came from people and organizations worth hearing:

• Boston College Law Professor Renee Jones
• MIT finance professor Haoxiang Zhu
• EDHEC’s private-assets researchers
• The Economic Policy Institute
• NASAA
• CFA Institute
• Americans for Financial Reform
• Roosevelt Institute
• Experienced financial advisers warning about liquidity mismatches
• Members of Congress concerned about retirement security

These commenters did not all demand an absolute prohibition on private equity. They approached the issue from different legal, economic and investor-protection perspectives.

Together, however, they demolished the idea that DOL’s current safe harbor protects workers.

Before any private-equity product receives safe-harbor treatment, the fiduciary should have to demonstrate:

1. Independently verified valuations
2. Valuation sensitivity ranges
3. Reported and unsmoothed risk measures
4. Multiple public-market-equivalent comparisons
5. Look-through disclosure of every fee and expense
6. Look-through leverage and refinancing stress tests
7. Liquidity stress tests based on actual participant behavior
8. Protections against stale-price transfers among participants
9. Analysis of continuation vehicles and cross-fund conflicts
10. Proof that the plan receives institutional-quality access
11. A written termination and mapping strategy
12. Contemporaneous records showing independent fiduciary judgment
13. A rebuttable—not conclusive—legal presumption
14. Full preservation of participants’ rights to discovery and relief

Anything less is not a safe harbor for workers.

It is a safe harbor for Wall Street.

The private-equity industry does not need 401(k) participants because workers have been unfairly denied a proven investment opportunity. It needs them because retirement plans represent trillions of dollars in patient capital, steady contributions and investors who cannot easily see—or escape—what is happening inside the product.

The authentic comments in this rulemaking warned DOL about that danger.

The dead people and manufactured form letters apparently told DOL what Wall Street wanted it to hear.

The question now is which group the Department intends to serve.

ERISA Private Equity Fiduciary Due Diligence Checklist