Betterment is the latest organization to oppose a new Labor Department policy that allows retirement plans to offer private equity strategies in their investment mix.
Betterment believes that “intelligent investment for retirement plans should start with access to low-fee vehicles that are easy to understand [and] are highly liquid vehicles for average investors,” says Edward Gottfried, director of Betterment for Business, the firm’s 401(k) plan product. Labor’s “private equity ruling flies in the face of that.”
The department in early June told a law firm representing private equity strategies in retirement plans that a fiduciary could offer a private equity option in a multi-asset target date, target risk or balanced fund structure as part of a “prudent investment mix.”
The fiduciary, however, “must evaluate the risks and benefits” of such investments, including fees, according to the department’s Information Letter, which lists a number of variables to consider, including fees, valuations and allocation limits.
Gottfried noted that Labor’s decision on private equity in 401(k) plans could also reverse a trend of lower fees and less complicated investment vehicles in those plans at a time when more smaller and midsize businesses are opening up plans. The Secure Act, which passed late last year, provides several incentives for those businesses to start retirement plans, including tax credits and the ability to join a multi-employer or pooled employer plan.
“Taking on a fiduciary responsibility when offering a private equity option can be a lot harder to fulfill,” Gottfried said.
But they may be tempted. “In the coming months, fund complexes and managers of Private Market Investments will likely seek to develop products consistent with the legal and operational complexities that are inherent in managing 401(k) plan assets,” wrote several attorneys at K&L Gates in a recent blog titled Private Equity in 401(k) Plans – A Trillion Dollar Opportunity?
Meanwhile, a recent UBS report on 121 global family offices, with an average $1.6 billion in assets under management, found that even though about three-quarters of them invest in private equity, only half expect private equity will outperform public markets, down from 73% in March, because of the COVID-19 pandemic.