The Department of Labor has issued guidance that clears the way for private equity investments to be offered as a component of defined contribution retirement plans.
In an information letter released today, Louis J. Campagna, chief of the DOL's Division of Fiduciary Interpretations, said, "a plan fiduciary would not, in the view of the department, 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 private equity component as a designated investment alternative for an ERISA covered individual account plan in the manner described in this letter."
The letter was developed by the DOL's Employee Benefits Security Administration (EBSA). Washington, DC-based Groom Law Group had requested that the DOL look into the matter on behalf of its clients, Pantheon Ventures and Partners Group, who have developed private equity have developed private equity investments designed to be used with managed asset allocation funds in an individual account plan.
In a separate press release, the DOL noted that private equity has long been a component of asset allocations for defined benefit plans that perform the foundation of the nation's pensions systems. They have not, however, been allowed for 401(k)s and other defined contribution plans used by millions of workers to save for retirement.
The guidance will allow individual investors to have a broader range of investment options for their defined-contribution savings accounts, the DOL said.
“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 in the release. “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.”
In the information letter, the DOL also pointed out that fiduciaries need to use discretion when using private equity investments.
"Private equity investments ... present additional considerations to participant-directed individual account plans that are different than those involved in defined benefit plans," the letter stated. "In making such a selection for an individual account plan, the fiduciary must engage in an objective, thorough, and analytical process that compares the asset allocation fund with appropriate alternative funds that do not include a private equity component, anticipated opportunities for investment diversification and enhanced investment returns, as well as the complexities associated with the private equity component."