Using Private Equity in Defined Contribution Plans

Aaron Ammerman |

On June 3, 2020, the U.S. Department of Labor (DOL) issued an information letter providing guidance around the use of private equity investments in defined contribution (DC) plans (e.g., 401(k)) as a component of a more diversified investment option, such as an asset allocation fund, a separately managed account, or a Collective Investment Trust.  

Employer-sponsored defined benefit (DB) plans, such as pension plans, have long leveraged these types of investments in portfolios, and the DOL’s guidance is focused on addressing use of these investments in DC plans. The letter identifies several factors plan fiduciaries should consider when evaluating the risks and benefits of choosing an investment fund with a private equity investment allocation. These factors are outlined to the right of this document.

Private equity investments present both opportunities and risks, and the plan fiduciary is responsible for understanding those considerations when selecting a fund as a designated investment alternative for a plan. The DOL suggests, as it does for selection of any investment option in an ERISA plan, engaging in an objective, thorough, and analytical process that compares the asset allocation strategy for investing options with and without a private equity investment allocation.

Information letters generally are not binding law, but rather, provide the DOL’s “well-established interpretation or principle of” ERISA, without addressing a specific factual situation. It bears noting that the DOL’s letter does not address investment vehicles that would allow a participant to invest directly in private equity investments, as these options present distinct legal and operational issues, e.g., valuations, for fiduciaries of ERISA-covered individual account plans. The letter also does not address any prohibited transaction issues arising from private equity investments.

While there was a fair amount of press around it, this information letter did not present new analysis or insight into the DOL’s general views on fiduciary plan investment selection or monitoring. Rather, the DOL acknowledged the use of PE as a component of a larger asset allocation investment option.

Click the PDF link below to continue reading the factors plan fiduciaries should evaluate and consider.

Using Private Equity in Defined Contribution Plans