The U.S. Department of Labor issued important new guidance for 401k plan investment committees on June 3 that want to include private equity as a component of a target date fund (TDF) or other diversified investment fund offered within a 401k plan.
The Information Letter—issued to Groom Law Group on behalf of two of its clients—marks the first time DOL has addressed the use of private equity in defined contribution retirement plans.
“For decades, institutional investors like traditional pension plans and endowments have invested in private equity, but 401k plan fiduciaries have been reluctant to add the asset class to their plans in the absence of specific guidance from DOL,” said Groom Law Group Principal Jon Breyfogle.
He added that the Information Letter from the DOL’s Louis J. Campagna, Chief, Division of Fiduciary Interpretations, Office of Regulations and Interpretations, is important because it gives fiduciaries more legal certainty if they want to consider additional asset classes as part of a diversified 401k investment option.
The Information Letter confirms that plan fiduciaries can prudently offer private equity as part of an ERISA plan’s diversified investment option, such as a TDF, within a DC plan. The Information Letter assists plan fiduciaries by providing a detailed guidance on the important considerations for demonstrating a prudent process when considering private equity investments.
Additionally, the DOL acknowledges this type of fund could be structured in multiple ways, including as a separately managed account managed by a plan investment committee or managed by an investment manager exercising delegated investment responsibility, or as a pre-packaged fund-of-funds structured as a collective investment trust (CIT) or other pooled vehicle.
The DOL clarified, however, that the guidance does not address vehicles that would allow a participant to invest in private equity directly, and that such investments present distinct legal and operations issues.
Groom Law Group has posted a summary of the guidance that provides an analytical framework fiduciaries can use when considering a fund that includes private equity investments, and analysis of specific considerations the DOL identified as important.
While the guidance is novel, the DOL has taken similar action in the past, issuing guidance that has established guideposts for new types of investments such as derivatives, liability-driven investment strategies and annuities, Groom’s summary concludes.
• SEE ALSO: Are Alternative Investments Warranted (or Wanted) in 401ks?
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
