The Labor Department has given 401(k) plans permission to include private equity strategies within diversified investment options such as target date, target risk or balanced funds.
In an information letter to a law firm representing clients who provide private equity strategies to retirement plans, Labor Department attorney Louis J. Campagna wrote that a plan fiduciary “may offer an asset allocation fund with a private equity component … in a manner consistent with the requirements of Title I” of the Employee Retirement Income Security Act.
“This letter should assure defined contribution plan fiduciaries that private equity may be part of a prudent investment mix and a way to enhance retirement savings and investment security for American workers,” said the acting assistant secretary of labor for the Employee Benefits Security Administration, Jeanne Klinefelter Wilson, in a statement.
SEC Chairman Jay Clayton, in the same statement, said the Labor Department’s decision would provide long-term retirement investors “with a choice of professionally managed funds that more closely match the diversified public and private market asset allocation strategies pursued by many well-managed pension funds.”
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.
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