June 29, 2020

BenefitsPRO Turns to Fred Reish for Insight on Private Equity Funds in 401(k)s

In an interview with BenefitsPRO, partner Fred Reish shared his reaction and key takeaways from the Department of Labor (DOL)’s recent guidance on private equity funds being included in retirement funds.

In the article “DOL opens 401(k)s to funds incorporating private equity,” Reish told the industry publication that despite the recent guidance, plan sponsors may not immediately implement private equity in 401(k) plans.

“Plan fiduciaries tend to be relatively slow to take up changes,” Reish told BenefitsPRO. “Most plan fiduciaries aren’t ordinarily looking for the new thing. They wait and see if others are adopting it.”

Reish made it clear to the publication that he wasn’t commenting on the pros and cons of investing in private equity.

But, “the DOL said if you do it properly, you can do it. Much of the rest of the guidance is how to do it properly,” Reish said. Plan sponsors would overall be better “turning to ERISA attorneys and investment advisors to look at trends and possible claims,” Reish added. “That’s much better than saying ‘I’m not going to consider something new.’”

Also in the interview, Reish noted that four considerations stood out for him in the DOL’s letter to Groom Law Group in which guidance was provided. According to Reish, the first is that plan fiduciaries must have enough information to evaluate private equity. Second is the issue of being able to provide information to participants so they can decide whether to invest. Then there’s the matter of liquidity. “Liquidity in 401(k) plans is far different from in private equity. The liquidity issue is something a portfolio provider will have to figure out,” Reish added. And, lastly, valuation — being able to set a value on the investment, which a portfolio with private equity must be able to do – an action “which historically is what private equity can’t do.”

Reish also noted that in order for such a product to gain traction, it would likely take the form of a target-date fund and a qualified default investment alternative.

“It will take a collaborative effort between a sponsor, their ERISA attorney and their investment advisor, engaged in a prudent process, to work toward offering private equity,” Reish said, and with a professionally managed portfolio and an experienced investment advisor, litigation should be avoided.

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