Reuters reports that the federal government recently opened the door for plan sponsors to add private equity funds to their 401(k) plans. In the article “What Would Private Equity Funds in 401(k)s Mean for Retirement Savers?” partner Fred Reish spoke with the publication about this new development and what it means for plan sponsors.
According to Reuters, private equity proponents scored a win on June 3, 2020, when the U.S. Department of Labor (DOL) issued a guidance letter outlining how private equity funds could be added to defined contribution plans under existing rules. The publication claims that this letter could mark a turning point in a broader move to open up private equity investing to individual investors.
Some experts believe that one challenge for plan sponsors will be how to value private equity on a daily basis. In 401(k) plans, participants are able to check the value of their holdings at any time, but valuations of private equity investments are updated only periodically.
According to Reish, the DOL letter lays out some fiduciary hurdles that plan sponsors would have to overcome. “It says fiduciaries must have the expertise to be able to evaluate these products or hire advisers or managers who do. And participants must be given information that they can understand and use to decide whether or not to be in that investment,” he said.
Reish thinks those goals can be met by large, sophisticated 401(k) plans, but he does not expect to see private equity turning up in plans overnight, noting employers are a cautious bunch. “They read all the headlines about other plan sponsors being sued for violations of their fiduciary duties, and it scares them to death.”