The U.S. Department of Labor (DOL) released a supplemental statement in December 2021 around the inclusion of private equity (PE) within a defined contribution (DC) plan’s designated investment alternative.
Background on Private Equity in DC Plans
The DOL published an information letter in June 2020 stating that DC plan fiduciaries considering the inclusion of PE in their plan (within a multi-asset framework) must adhere to the same standards and weigh the same considerations they would for other asset classes.
The letter also provided considerations specific to PE investments that plan fiduciaries should weigh and concluded that “a plan fiduciary would not violate the fiduciary’s duties under section 403 and 404 of ERISA solely because the fiduciary offers a professionally managed asset allocation fund with a PE component as a designated investment alternative for an ERISA covered individual account plan in the manner described in this letter.”
In response, stakeholders asserted the letter could be perceived as an endorsement of the potential benefits of PE investments without sufficient mention of the associated risks. In the supplemental statement, the DOL agreed with certain stakeholder claims that the June 2020 information letter was too reflective of the perspective of the PE industry and not sufficiently balanced with research from independent sources.
In addition, the supplemental statement reiterated the necessary steps plan fiduciaries must follow to satisfy their ERISA duties to prudently select and monitor investment options and commented on the ability of plan fiduciaries to meet these requirements in light of plan size and previous experience with such investments.
Specifically, the DOL stated that plan fiduciaries with experience evaluating PE investments in their defined benefit plans “may be suited to analyze these investments for a participant-directed individual account plan.” On the other hand, the statement noted that fiduciaries of smaller DC plans “are not likely suited to evaluate the use of PE investments in designated investment alternatives in individual account plans.”
Bottom Line
The supplemental statement marked a shift in tone from the June 2020 information letter, and the DOL was adamant in its stance that the information letter should not be perceived as a blanket endorsement of PE investments in DC plans.
Despite the shift in tone, the inclusion of PE within a DC multi-asset framework is not strictly prohibited. However, PE investments present unique challenges and factors that plan fiduciaries should consider, including fees, access, liquidity, valuation, and transparency. Importantly, plan fiduciaries that seek to include PE in their DC plan should evaluate these factors, among others, to ensure they comply with their ERISA duties to follow a prudent selection and monitoring process.
