January 28, 2022

Department of Labor Issues New Guidance on Private Equity Investments in Individual Account Plans

On December 21, 2021, the Department of Labor (DOL) issued additional guidance on the use of private equity investments in certain retirement plans, warning that most plan fiduciaries will not have enough experience to adequately evaluate such investments.

The DOL’s guidance relates to a June 3, 2020 “information letter” (which is a non-binding statement) issued by the Employee Benefits Security Administration of the DOL . In that information letter, the DOL addressed private equity investments in “designated investment alternatives” (or DIAs) offered to participants in individual account plans, like 401(k) plans, considered whether ERISA prohibits offering certain private equity investments to participants in individual account plans.

The information letter summarized some information that the attorney had submitted in their request for guidance, including information about characteristics and potential benefits of private equity investments. The DOL considered a particular use of private equity investments – namely DIAs that have private equity investment components, such as a custom target-date fund, a target-risk fund, a balanced fund, or other type of collective trust, which are diversified, with limited exposure to private equity investments, and that provide sufficient liquidity to participants. The information letter identified factors that plan fiduciaries should consider when evaluating DIAs with a private equity component, and concluded that a plan fiduciary would not violate ERISA fiduciary duties solely because the fiduciary offers a fund with a private equity component.

On December 21, 2021, the DOL issued the “Supplemental Statement of Private Equity in Defined Contribution Plan Designated Investment Alternatives.” The supplemental statement explains that the DOL received “questions and reactions” regarding the June 3, 2020 information letter, and had reviewed a “Risk Alert” issued by the Securities and Exchange Commission (SEC) that warned of “compliance issues” in examinations of registered investment advisers that manage PE funds or hedge funds. After considering the questions and reactions and SEC Risk Alert, the DOL issued the supplemental statement, purportedly to ensure that people do not “misread[ ]” the June 3, 2020 information letter.

The supplemental statement makes two principal points. The first clarifies that the June 3, 2020 information letter was not “balanced with counter-arguments and research data” concerning the risks of private equity investments. The supplemental statement summarized some of these counter-arguments, including that private equity investments do not have standardized performance metrics, may not have adequate disclosures to plan participants, and may have liquidity restrictions. The second point is that some plan fiduciaries may not have the level of knowledge necessary to evaluate private equity investments and may need to seek assistance from qualified advisors. The DOL warned that only a “minority of situations” will involve plan-level fiduciaries with appropriate experience evaluating private equity investments.

Given the current litigation landscape, the supplemental statement may provide potential plaintiffs with arguments against the use of private equity investments in individual account based retirement plans. Fiduciaries that are considering using or retaining private equity investments should take particular care to assess the investments carefully, with assistance from independent advisers, as necessary, and document their efforts appropriately.

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