DOL Gives Green Light for Private Equity in 401(k)s

The DOL letter, sent to the Groom Law Group on behalf of Pantheon Ventures and Partners Group, allows a private equity option within defined contribution plans but does not require it.

The letter notes “important differences between a fiduciary’s decision to include private equity investments in the portfolio of a professionally managed defined benefit plan, and the decision to include an asset allocation fund with a private equity component as part of the investment lineup for a participant-directed individual account plan.” 

Private equity strategies and structures tend to more more complex, with longer time horizons and higher fees than publicly traded securities, which are the typical investment options in DC plans, according to the Labor Department.

Given those differences, the letter lays out certain considerations for defined contribution fiduciaries to consider before including a private equity option in allocation, including:

• The risks and benefits associated with the private equity investment alternatives along with range of expected returns net of fees and diversification of risks over a multi-year period
• The ability of plan fiduciaries to evaluate and monitor private equity investments or choose an investment consultant or a delegated investment manager for that task
• The percentage of the investment option to be invested in the private equity component 
• The liquidity component of private equity to manage participant-directed deposits and withdrawals and whether any potential liquidity restrictions align with the plan participant population, in terms of age, turnover and contribution and withdrawal patterns 
• The adequacy of disclosures provided to plan participants concerning the character and risks of the investment options, including a private equity component.

— Related on ThinkAdvisor:

• DOL Fiduciary Rule Reboot Lands at OMB
• More 401(k) Plans Are Liberalizing Rules Than Cutting Benefits: Survey