DOL Issues Guidance on Retirement Plan Investment Alternatives:

On June 3, 2020, the DOL issued Information Letter 06-03-2020 (the “IL”). The IL addresses the use of private equity investments within professionally managed asset allocation funds that are investment alternatives in participant-directed individual account plans (e.g., 401(k) plans).

The two investment funds involved here would be offered as collective investment trusts that invest in private equity and that have a liquidity component (to manage participant-directed deposits and withdrawals from the funds). The firms requesting the IL state that some private equity investments might offer the potential for enhanced returns over time, by giving investors a stake in privately-held companies during their early growth stages. The firms also state that private equity investments might contribute to diversification and provide a hedge against market downturns, by offering investment opportunities “that do not move in tight lockstep with the broader public market.” In addition, the firms note that the private equity investments “would be offered as part of a multi-asset class vehicle structured as a custom target date, target risk, or balanced fund.”

The firms also state that: (1) although defined benefit plan sponsors may invest in private equity for those plans, defined contribution plan sponsors typically do not; and (2) without DOL guidance, defined contribution plan sponsors are likely concerned that they may incur fiduciary liability “even where they believe that providing prudently selected and monitored exposure to private equity investments is in the best interest of their individual account plan participants.”

The DOL began its analysis by stating the following general rules: (1) ERISA fiduciaries have duties to prudently select and monitor any investment alternative under their plans, and liability will apply for losses resulting from a failure to satisfy those duties; and (2) such fiduciaries, when evaluating an investment alternative, must engage in an objective, thorough, and analytical process that involves consideration of all relevant facts and circumstances before acting accordingly. The DOL then concluded that “a plan fiduciary of an individual account plan may offer an asset allocation fund with a private equity component of the type [the firms] describe in a manner consistent with the requirements of Title I of ERISA.”  

In expanding on that conclusion, the DOL stated that when fiduciaries decide whether to include an investment fund with an allocation of private equity as a plan investment alternative, they must consider:

  • Whether adding the fund would offer participants the opportunity to invest their accounts among more diversified investment options within an appropriate range of expected returns, net of fees;
  • Whether the fund is overseen by plan fiduciaries or managed by investment professionals who have sufficient experience to manage the fund;
  • Whether the fund limits the allocation of investments to private equity in a way that is designed to address the unique characteristics of such investment (e.g., including cost, complexity, liquidity) and has adopted proper features related to liquidity and valuation; and
  • Whether participants would be provided with sufficient information regarding the fund’s character and risks, to enable them to make an informed decision as to whether to invest in the fund.

Here is a link to the IL: