The Department of Labor’s June 3 Information Letter that opens the door for 401ks to include private equity investments has sparked plenty of reaction—both for and against the concept.
Long silent on the matter, the DOL spoke up to say companies can responsibly offer private-equity investments in diversified vehicles like target date funds, and would not violate their fiduciary duty to act prudently as long as they carefully consider issues such as fees and risk.
The landmark decision pries open the door to the multi-trillion-dollar retirement plan market for the private equity market, long keen on gaining access. Private equity investments have typically been reserved for the very wealthy and institutional investors.
The DOL noted in a statement that private equity’s entry into retirement savings was needed to “remove barriers” to economic recovery. From the statement:
On May 19, 2020, President Trump issued Regulatory Relief to Support Economic Recovery Executive Order 13924. President Trump directed agencies “to remove barriers to the greatest engine of economic prosperity the world has ever known: the innovation, initiative, and drive of the American people” in order that we may “overcome the effects the virus has had on our economy.”
“This Information Letter will help Americans saving for retirement gain access to alternative investments that often provide strong returns,” U.S. Secretary of Labor Eugene Scalia said. “The Letter helps level the playing field for ordinary investors and is another step by the Department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”
The Trump Administration using the pandemic crisis to loosen restrictions on 401k investments drew the ire of Dennis Kelleher, CEO of Better Markets, a “non-partisan” organization that promotes the public interest in financial markets.
“The last thing the Department of Labor should be doing is enabling or encouraging retiree money to be diverted from transparent public markets with significant disclosure and investor protections to high-risk, dark private markets with little disclosure and few investor protections. To use the pandemic as a pretext for this irresponsible action is adding insult to injury,” Kelleher said in a statement.
Other opponents have expressed concerns about average 401k participants not understanding the increased risk of investing in private equity, the potential for more lawsuits against plan sponsors for breach of fiduciary duty. Concerns are to be expected from plan sponsors about their ERISA liability risk given the amount of litigation focused on alleged excessive and hidden fees and potentially risky or complex investment options that deviate from the historical norm for 401k plans.
Also, at the end of this article are a pair of links to recent columns slamming the decision to open up the retirement plan market to private equity.
Supporters say PE has important role
But proponents of allowing private equity investments in 401ks have been plenty vocal as well—particularly those who had something to do with it.
SEC Chairman Jay Clayton commended the Department’s efforts to improve investor choice and investor protection in the DOL statement, saying the Information Letter, developed by the DOL’s Employee Benefits Security Administration, “will provide our long-term Main Street investors with a choice of professionally managed funds that more closely match the diversified public and private market asset allocation strategies pursued by many well-managed pension funds as well as the benefit of selection and monitoring by ERISA fiduciaries.”
EBSA Acting Assistant Secretary Jeanne Wilson added, “This [Information] Letter should assure defined contribution plan fiduciaries that private equity may be part of a prudent investment mix and a way to enhance retirement savings and investment security for American workers.”
Susan Long McAndrews, Partner at Pantheon, one of the two Groom Law Group clients for which the Information Letter was issued, said it is a critical step toward improving retirement outcomes at a time when research estimates 50% of households are ‘at risk’ of not having enough income to maintain their living standards in retirement.
“We believe private equity has an important role to play in enhancing potential retirement outcomes and [the June 3] announcement provides necessary clarity to plan sponsors that private equity can be incorporated as an allocation option under ERISA,” McAndrews said. “Many people understand the dynamics of the shrinking public markets, and that exposure to small- and mid-sized companies—especially technology companies experiencing significant growth—is often only available through private investments.”
Less understood, she adds, is the performance gap. “In our view, retirees really can’t afford to leave 40 basis points annually on the table over a 35-year investment horizon. We believe the Department’s action … is an important step to address this and we look forward to working with plan sponsors to offer millions of ordinary working Americans the potential for a more secure retirement.”
According to Hal Scott, President of the Committee on Capital Markets Regulation and Emeritus Nomura Professor, Harvard Law School, “the DOL’s information letter is a major step towards providing U.S. retirees that have over $6 trillion in 401k retirement savings with access to the high returns and diversification benefits of private equity.”
The Committee on Capital Markets Regulation, an independent research organization with thirty-five members drawn from the finance, law and academic communities, strongly supports expanded access to private equity for retirees and retail investors.
According to research by the Committee, 98% of U.S. households cannot invest directly in private equity. “As the number of public companies continues to shrink, retail investors are clearly missing out on investment opportunities,” the Committee said in a statement.
Editor’s Note: For a deeper dive into the arguments of opponents to allowing private equity investments in 401k plans, check out the following commentaries from Yves Smith of Naked Capitalism and The American Prospect’s David Dayen: