Best Practices for Educating 401(k) Participants on Alternative Investments

As many defined contribution plans may begin to incorporate alternative investments through target-date fund (TDF) sleeves, collective investment trusts (CITs), or as standalone menu options, plan sponsors should equip participants with the education and knowledge to thoroughly evaluate and make informed decisions about these complex asset classes. The US Department of Labor (DOL) rules provide guidance designed to make sure participants have sufficient information on the specifics of their investment options so they can make informed decisions. Plan sponsors have a fiduciary responsibility under the Employee Retirement Income Security Act of 1974 (ERISA) to act in participants’ best interests and provide a reasonable range of investment choices. Participant education is paramount, especially if the DOL’s proposed rule titled "Fiduciary Duties in Selecting Designated Investment Alternatives" becomes final.

The proposed rule, which is expected to be finalized later this year or early next, would create a process-based safe harbor under the ERISA for plan fiduciaries selecting investment options—including alternative investments.

This article will discuss why plan sponsors should educate their participants on alternative investments, effective education strategies, and the fiduciary obligations retirement plans should uphold when sharing knowledge to ensure it is not construed as investment advice.

Key takeaways:

• Plan sponsors should educate their 401(k) participants on alternative investments since their parameters are different than traditional plan investment options that offer daily valuation, same-day liquidity, and straightforward performance benchmarks. Same for plan sponsor personnel, plan administrative, and investment committees.
• There are a number of effective education strategies for plan sponsors, including how alternative investments can enhance asset allocation, the use of plain language disclosures, addressing liquidity parameters, and more.
• Education programs for alternative investments carry fiduciary implications that plan sponsors should understand, predominantly an appreciation of a clear separation between education and recommendation. Investment education should be objective, balanced, and not direct participants toward specific investments. Providing advice is a fiduciary act.
• Building an effective education program for alternative investments is an ongoing commitment, not a one-time disclosure exercise.
• Plan sponsors have a fiduciary responsibility to act solely in the interest of plan participants. Accordingly, in carrying out their duties prudently, plan sponsors benefit from providing helpful, understandable information to help plan participants make informed investment decisions.

Why Education Matters for Both Participants & Plan Sponsors

Plan sponsors should educate themselves and their participants on alternative investments, as these investments disrupt daily valuation, same-day liquidity, and straightforward performance benchmarks that traditional plan participants are accustomed to. Alternative investments require a different framework entirely — one that addresses illiquidity premiums, J-curves, capital calls, and valuation timing, and the different types of alternative investments have different parameters, whether hedge funds, private equity funds, venture capital, private credit, or real estate, among others. Plan sponsors should build that framework for participants before, not after, these options appear on the investment menu.

Without deliberate education, participants may misinterpret lagged valuations as errors, confuse the real value available to them, attempt redemptions during restricted periods, or misalign these investments with their actual time horizons and risk tolerance.

There are also risks for plan sponsors who add alternatives to the investment menu without adequate education. They can expose themselves to fiduciary scrutiny, especially in the areas of prudence and diversification, participant complaints, and potential litigation. Thorough, documented education is both a participant benefit and a fiduciary safeguard.

Effective Education Strategies

Below are some effective strategies plan sponsors can use to educate their participants on alternative investments.

Start with the "Why" Before the "What." Participants engage more readily when they understand the purpose of an investment, not just its mechanics. Alternative investments should be framed in terms of the shortcomings they can address and goals they can achieve, such as potentially higher long-term returns, income generation, inflation protection, or reduced correlation to public markets.

Use Plain Language Disclosures. Regulatory disclosures are necessary but rarely sufficient for genuine understanding. Plan sponsors should supplement required documentation with plain-language summaries that translate key concepts. For example, replacing “semi-liquid structure with quarterly redemption windows” with “you can only withdraw from this investment once every three months, not at any time like a traditional fund” is more effective.

Address Liquidity Directly and Proactively. Liquidity is the parameter most likely to generate confusion and dissatisfaction if not addressed immediately. Plan sponsors should be explicit about redemption terms, lock-up periods, and the consequences of requesting liquidity during a restricted window. They should direct education based on tenure to appropriately address those with a shorter time period till withdrawals in retirement.

Leverage Multiple Delivery Channels. Participants consume information differently. A robust education program distributes content across several channels rather than relying on any single medium.

• Plan website/portal. Best used for evergreen content, FAQs, and fund fact sheets. Must be kept current and should be linked prominently from enrollment materials.
• Email campaigns. Best used for targeted outreach, enrollment reminders, and market updates. Should be segmented by participant tenure and account balance for relevance.
• Live and recorded webinars. Best used for deep-dive education and Q&A sessions. All sessions should be recorded and available on demand.
• Short video explainers. Best used for introductions on concepts (J-curve, illiquidity premium, etc.) and should be kept under three minutes. It’s encouraged to use animation for abstract concepts.
• In-person meetings/workshops. Best used for high-engagement sessions for participants nearing retirement. They are particularly effective for participants with higher account balances.
• Call center and advisor access. Best used for one-on-one questions and complex situations. Training in alternative investment terminology should be required for representatives.

Segment Your Audience. Not all participants need the same level of education. Effective programs tailor messaging by age cohort, account balance, and proximity to retirement. Target-date fund participants who hold alternatives within a managed sleeve may need less granular education than participants who select alternatives directly from the plan’s menu, however for target date funds introducing alternatives to their lineup, education is recommended.

Train the Trainers. HR personnel, benefits administrators, and call center staff are frequently the first point of contact when participants have questions. If those individuals cannot confidently explain the different parameters between traditional and alternative investments, participants will be confused regardless of the written materials. Plan sponsors need to invest in structured training for all internal and external-facing staff who field participant inquiries about the plan.

Fiduciary Considerations in Education Programs

There are a handful of fiduciary obligations that plan sponsors and their plan committees need to uphold when educating participants on alternative investments. The DOL’s guidance distinguishes between general investment education — which does not constitute investment advice — and individualized investment advice, which triggers fiduciary obligations. Plan sponsors have the obligation to provide robust educational content that isn’t deemed investment advice as long as it is objective, balanced, and does not direct participants toward specific investment choices.

Plan sponsors should also confirm that any third-party education providers — record keepers, asset managers, or financial wellness platforms — are providing balanced content that does not implicitly favor one investment option over another. Conflicts of interest in participant education are a fiduciary concern, and plan sponsors are ultimately responsible for the quality and objectivity of education delivered on their behalf.

Key Questions for Plan Sponsors to Address:

• Does your education program accurately represent the risks of each alternative investment, including illiquidity, valuation complexity, and fee structures?
• Is your educational content reviewed for accuracy on at least an annual basis and updated when plan terms or investment options change?
• Do you have written documentation of all education delivered and participant engagement with that content?
• Are third-party education providers contractually obligated to deliver objective, balanced content?
• Have your HR and benefits staff received training sufficient to answer common participant questions without providing individualized investment advice?

Education Starts Before Launch

Building an effective education program for alternative investments is an ongoing commitment, not a one-time disclosure exercise. The following practices reflect what well-resourced plan sponsors do consistently:

• Start before launch. Begin education at least 90 days before alternatives appear on the investment menu, whether as standalone funds, as part of target date funds, or in other vehicles. Participants should understand these options before they need to make decisions about them.
• Measure engagement. Track open rates, video completion, webinar attendance, and portal visits. Use engagement data to identify gaps and refine content over time.
• Test for comprehension. Short knowledge-check quizzes embedded in digital content can reveal whether participants are absorbing key concepts, not just receiving communications.
• Gather feedback regularly. Annual participant surveys or post-webinar feedback forms address common points of confusion and allow the program to evolve in response to actual participant needs.
• Collaborate with managers. Alternative investment managers often have educational materials, case studies, and subject-matter resources they can provide. Use these thoughtfully — with appropriate review for objectivity.
• Keep disclosures current. Alternative investment structures, fee arrangements, and liquidity terms can change. Education materials must be reviewed and updated whenever plan terms are amended.

The Path Forward

Alternative investments offer meaningful potential benefits for retirement plan participants — diversification, inflation protection, and access to return streams not available in public markets. Realizing those benefits, however, requires participants who understand their investments. Plan sponsors who invest in substantive, ongoing education create better-informed participants, more defensible fiduciary records, and retirement plans that are genuinely equipped to serve participants' long-term interests.

Prosperity – An EisnerAmper Company, through their Retirement Plan Services team, works with plan sponsors to evaluate alternative investment options, assess fiduciary implications, and develop education strategies that align with plan design and participant demographics. To discuss how these considerations apply to your plan, contact our team.

For information on our Retirement Plan Services and Solutions: Click here or contact Michele Martin at michele.martin@prosperityea.com

^{Securities offered through DAI Securities, LLC, Member FINRA/SIPC. Advisory Services offered through Prosperity – An EisnerAmper Company. Prosperity – An EisnerAmper Company is not affiliated with DAI Securities, LLC.}

_{This information is intended for educational purposes only. It is not intended to provide investment or tax advice or provide the basis for any investment or tax decision. You should consult your financial advisor prior to making any decision based on any specific information contained herein. The specific tax consequences of any investment or strategy will depend on your specific tax situation.}

_{Investing in securities involves risk, including potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values}