CLIENT ALERT: Structuring ERISA Plan Alternative Investments in Real Estate

Plan sponsors considering the addition of alternative investments, including in real estate, to their participant-directed plans now have a clearer regulatory path forward. Executive Order 14330, signed on August 7, 2025, and a subsequent proposed U.S. Department of Labor (“DOL”) rule published on March 31, 2026, together establish a framework designed to reduce litigation exposure for qualified retirement plan fiduciaries who follow a prescribed due diligence process. However, this new safe harbor does not displace ERISA’s prohibited transaction rules, which present distinct structuring challenges in the real estate context in particular. This alert summarizes the regulatory framework and identifies the key structuring considerations for plan sponsors and their counsel.

The Regulatory Framework: Executive Order 14330 and the DOL’s Proposed Safe Harbor

Executive Order 14330, titled “Democratizing Access to Alternative Assets for 401(k) Investors,” directs executive branch agencies to facilitate broader participant access to alternative assets—including real estate funds, private equity, and other private market investments—through defined contribution plans. In response, the DOL published a proposed rule titled “Fiduciary Duties in Selecting Designated Investment Alternatives.” The proposal establishes a safe harbor creating a rebuttable presumption that a fiduciary satisfied the duty of prudence by adhering to a prescribed six-factor evaluation process:

• Performance: Whether the investment is expected to deliver competitive risk-adjusted returns relative to other reasonable alternatives.
• Fees: Whether fees are reasonable relative to the risk-adjusted returns and value delivered to participants.
• Liquidity: Whether the investment provides sufficient liquidity for plan operations.
• Valuation: Whether the fund employs independent appraisals or other accepted methodologies to produce accurate net asset values.
• Performance Benchmarks: Whether each investment is measured against a meaningful benchmark.
• Complexity: Whether the fiduciary (or its retained advisors) possesses sufficient expertise.

Structuring Considerations for Real Estate Investments

While the proposed safe harbor provides a process-based defense to prudence claims, it does not address the separate—and often more complex—prohibited transaction rules under ERISA Section 406 and Internal Revenue Code (“Code”) Section 4975. A prohibited transaction occurs when a plan engages in a direct or indirect transaction—including a sale, exchange, loan, or lease—with a disqualified person. Under IRS rules, violations carry an initial excise tax of 15% on the “amount involved,”[1] increasing to 100% if the transaction is not corrected timely. In the real estate context, the following categories of prohibited transaction risk require particular attention:

Self-Dealing and Personal Use. A fiduciary or related party may not use, occupy, rent, purchase, or sell plan-held property for personal use or benefit.

Conflicts of Interest in Service Providers. Services provided to plan-held property by the fiduciary’s affiliated businesses constitute prohibited transactions unless a statutory or administrative exemption applies. Even arm’s-length or fair market value pricing does not cure a structural conflict without an applicable exemption.

Use of Plan Assets for Personal Benefit. Personal guarantees of loans on plan-held property, personal payment of property expenses, or receipt of rental income or other property revenue outside of the plan may each constitute a prohibited transaction.

Party-in-Interest Issues in Joint Ventures and Co-Investments. Where a plan co-invests alongside the fiduciary, the fiduciary’s related entities, or other plan insiders, the transaction structure must ensure that no disqualified person or party-in-interest receives a disproportionate benefit or participates on terms unavailable to the plan.

Structuring Solutions

Plan sponsors can mitigate prohibited transaction risk through deliberate structural choices, including structures that avoid “plan assets” treatment altogether. The following approaches should be considered:

Use of Pooled Investment Vehicles and Operating Company Structures. Investing through a commingled real estate fund or REIT, Real Estate Operating Company (REOC), rather than acquiring direct property interests, introduces structural separation between the plan and the underlying real estate. Critically, if an entity qualifies as an “operating company” under the DOL’s plan assets regulation its underlying assets are not treated as plan assets for ERISA purposes—even where plan investors hold a significant equity interest. A REOC qualifies where at least 50% of its assets (valued at cost) are invested in real estate that is managed or developed by the entity or an affiliate, and the entity has the right to substantially participate in management of the real estate. This treatment eliminates the application of ERISA’s fiduciary and prohibited transaction rules at the property level, substantially reducing structuring complexity. Plan sponsors should confirm that the fund or entity satisfies the operating company test on an ongoing basis, as a loss of operating company status would cause the entity’s assets to become plan assets retroactively.

Independent Fiduciary or Investment Manager. Appointing an independent fiduciary or qualified professional asset manager (QPAM) to manage real estate investments can provide coverage under Prohibited Transaction Exemption (PTE) 84-14 or similar relief, which permits certain transactions that would otherwise be prohibited, provided the independent manager exercises sole discretionary authority over the plan’s assets. Where a REOC structure is not available or where direct plan asset exposure exists, QPAM relief may be the primary mechanism for permitting necessary transactions between the plan and service providers affiliated with the fiduciary.

Conflict Screening and Recusal Procedures. Plan sponsors should implement written policies requiring disclosure of potential conflicts and recusal of any fiduciary with a personal or business interest in a proposed real estate investment. Documentation of these procedures supports a defense against inadvertent prohibited transactions.

Prohibited Transaction Exemptions. Where a transaction involves a disqualified person but serves the plan’s interests, fiduciaries should evaluate whether a statutory exemption (e.g., ERISA Section 408(b)(2) for reasonable service arrangements) or an individual or class exemption issued by the DOL may apply. Reliance on an exemption requires strict compliance with each condition of the exemption.

Arm’s-Length Terms with Independent Valuation. Although arm’s-length pricing alone does not cure a structural prohibited transaction, ensuring that all transactions are conducted at fair market value, supported by independent third-party appraisals, strengthens the plan’s position if a transaction is later challenged and may satisfy the conditions of applicable exemptions.

Conclusion

The DOL’s proposed safe harbor, if finalized, will provide plan sponsors meaningful litigation protection through a defined six-factor prudence framework. It does not, however, displace prohibited transaction liability. Fiduciaries must independently ensure that alternative investments are structured to avoid direct or indirect benefits to disqualified persons. With the rule still in proposed form, plan sponsors should use this period to evaluate potential real estate allocations and establish the governance frameworks necessary to act upon final adoption.

Please contact the Olshan attorney with whom you regularly work or one of the attorneys listed below to discuss structuring considerations for alternative investments in your plan or if you have questions regarding the proposed rule.

[1] The “amount involved” is defined under Section 4975(f)(4) of the Code as the greater of (i) the fair market value of the property given or (ii) the fair market value of the property received in connection with the prohibited transaction; for services, it is the excess compensation received by the disqualified person.

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