The Department of Labor released a follow-up on Monday to June 2020 Information Letter on offering private equity investments in retirement savings plans.
The clarification, contained in a Supplemental Statement, was in response to critics’ contention that language in the original Information Letter too closely matched private equity proponent arguments for its use in retirement plans without providing a proper counterbalance.
“The department concluded it was important to release a statement cautioning fiduciaries”
Acting Assistant Secretary for EBSA Ali Khawar
“For example, some stakeholders expressed concern about representations that designated investment alternatives with a PE component ‘offer plan participants who have longer investment horizons an equities-based investment choice that may enhance retirement outcomes when compared to investment choices containing only publicly traded securities,’” the statement read.
The stakeholders challenged that assertion and warned that performance calculations must be carefully analyzed because they are not standardized or regulated like disclosures from registered investment companies (for instance, mutual funds).
Fiduciary risk
The statement also cautioned plan fiduciaries against the perception that private equity is generally appropriate as a component of a designated investment alternative in a typical 401k plan. It expressed the department’s view that fiduciaries of small plans typically will not have the expertise necessary for the complex evaluation needed to determine the prudence of private equity investments in designated investment options in participant-directed plans.
“The Supplemental Statement emphasizes the limited focus of the Information Letter as a response to large plan sponsors who offer both defined benefit plans and participant-directed retirement savings plans, and who invest in private equity for their defined-benefit plans but do not do so for the participant-directed plans,” Acting Assistant Secretary for Employee Benefits Security Ali Khawar said in a statement. “After considering reactions to the Information Letter by stakeholders, the department concluded it was important to release a statement cautioning fiduciaries, especially in small plans, against marketing efforts that may misrepresent the Information Letter as a U.S. Department of Labor endorsement or recommendation of these investments for 401k plans.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
